Regardless of these factors, there are certain key provisions that are heavily negotiated in most purchase and sale transactions.
Once a purchaser and seller agree to enter into a transaction for a specific property, the parties typically enter into either a term sheet or a letter of intent (LOI). There is generally no substantive difference between a term sheet and an LOI, and both types of agreements can take many different forms. Sometimes the parties only want to memorialize the most basic terms of the transaction; other times, the parties draft extensive and detailed preliminary agreements that include very specific and detailed deal terms and provisions.
Although LOIs are not generally binding on the parties, the key economic and business issues spelled out in the LOI are customarily treated as non-negotiable once the LOI is signed. A party that attempts to renegotiate (or retrade) key LOI terms in the purchase and sale agreement risks its reputation in the marketplace.
Even after the parties have agreed to the basic terms of the transaction covered by a thoroughly drafted LOI, several concepts remain open to negotiation and are typically addressed in the purchase and sale agreement.
A due diligence period gives the purchaser the right to investigate various aspects of the property and the seller, and to terminate the purchase and sale agreement and receive a refund of its deposit if it finds any matters unsatisfactory. This is typically negotiated between the seller and the purchaser.
The scope and timing of the due diligence period can vary greatly depending on the nature of the real property, the structure of the transaction, and the negotiating leverage of the parties involved.
A purchaser's due diligence investigation typically falls into several different categories, including the review of:
A purchaser should generally expect that the broader the scope of the due diligence review and the more due diligence materials the seller is required to produce, the fewer representations the seller is inclined to give.
While the term of the due diligence period is typically included in the LOI, many details are often left to be negotiated in the purchase and sale agreement such as:
Representations and warranties in commercial real estate transactions are typically heavily negotiated and each party's negotiating position often governs the outcome. The primary role of representations and warranties is to set out the facts the parties relied on in agreeing to enter into the transaction.
These facts serve as a baseline, allowing each party to make claims against the other if the actual facts represented and warranted turn out to be different than those stated in the purchase and sale agreement. Representations and warranties in commercial real estate purchase and sale agreements typically cover:
Representations and warranties are equally important to both purchasers and sellers because the parties often use the representations and warranties in a purchase and sale agreement as a risk allocation device to:
The purchaser is typically interested in representations and warranties of the seller that uncover information about the seller or the property, relate to topics that may cost the purchaser money, or expose the purchaser to unwanted or unanticipated liability.
Sellers, on the other hand, attempt to limit representations and warranties that relate to topics that may expose the seller to unwanted liability, or require the seller to take some type of action or incur an expense before the closing.
The seller typically must remake its representations on the closing date so the purchaser can confirm no material changes have occurred between contract signing and closing. Defining material for this purpose is often a heavily negotiated point.
Other significant negotiating points related to representations and warranties include the survival period and remedies for a misrepresentation, including floors and caps on seller's liability.
Unlike representations and warranties, which are generally limited to a particular section of a purchase and sale agreement, covenants and rights appear throughout the agreement. Covenants relating to the use and operation of the property during the contract period are of importance to both parties and heavily negotiated.
Typical seller covenants include:
The purchaser should pay close attention to its closing conditions, or the conditions precedent to the purchaser’s obligation to purchase the property, for two primary reasons:
The purchaser should require each contingency relating to its intended use of the property be included as a closing condition. Examples of these contingencies are zoning approvals for development properties, and third-party approvals, such as lender consent for a loan assumption and franchisor consent for a hotel property.
In addition to these contingency-related conditions, the most common conditions to the purchaser’s obligation to close are:
The seller generally has fewer closing concerns and thus fewer conditions precedent to its obligation to close than the purchaser. If the purchaser comes to the closing with the purchase price, the seller is likely to close. Customary conditions to the seller’s obligation to close the transaction are:
When drafting the purchase and sale agreement, the parties should further detail how prorations and apportionments will be made between the parties.
The purchase and sale agreement should provide:
Commercial real estate purchase and sale agreements are complex documents, and the above points are only samples of the many key negotiations that occur between purchasers and sellers of commercial real property.