Sometimes, what you don’t know can hurt you.
Preparation of a commercial real estate purchase agreement can be challenging for the inexperienced. Although the parties will generally have reached agreement on the price, the devil is in the details. The first draft of the contract is often the buyer’s responsibility. The seller's attorney must then revise the agreement to ensure maximum protection for the client. Aside from revising the purchaser's draft agreement, it is important to determine what provisions are missing from the purchaser's draft. Buyers often leave out certain provisions which are to their disadvantage. Below are a few suggested provisions that are important for sellers to keep in mind when examining their real estate contracts. If the following items are not addressed in your potential buyer’s proposed draft, then you should consider including them.
Preparation of a commercial real estate purchase agreement can be challenging for the inexperienced. Although the parties will generally have reached agreement on the price, the devil is in the details. The first draft of the contract is often the buyer’s responsibility. The seller's attorney must then revise the agreement to ensure maximum protection for the client. Aside from revising the purchaser's draft agreement, it is important to determine what provisions are missing from the purchaser's draft. Buyers often leave out certain provisions which are to their disadvantage. Below are a few suggested provisions that are important for sellers to keep in mind when examining their real estate contracts. If the following items are not addressed in your potential buyer’s proposed draft, then you should consider including them.
- “Time is of the essence” clause: This helps buyers from dragging their heels during the sales process. Include a hard deadline after which point, if the sale has not yet closed, the seller may pursue other buyers for the property.
- Clarify term of representations and warranties: The buyer’s draft will contain a laundry list of seller representations and warranties. If the draft agreement is silent as to whether the seller’s representations and warranties survive closing, a seller should not allow the issue to remain ambiguous. The seller should add language stating that its representation and warranties do not survive at all or that its representations and warranties survive for an agreed upon period but no longer. Whether the buyer will accept a clause that limits survival is a topic of negotiation that will depend on the negotiating power of the two sides.
- To the best of seller's knowledge: While the representations of the buyer's draft agreement will generally be unqualified, the seller will often qualify the representations as being "to the best of seller's knowledge." The seller's modification is certainly better than an unqualified representation, but such language could be interpreted as requiring the seller to investigate the facts of the clause at issue or be charged with constructive knowledge based on the knowledge of its employees. To avoid these uncertainties, it is recommended that the seller include a definition of knowledge which limits knowledge to the actual, subjective knowledge of a named individual and expressly excludes constructive knowledge, imputed knowledge and any duty to investigate. Once defined, the same knowledge language should be used throughout the contract where a representation of knowledge is called for.
- Binding only once fully-executed: There is some support to the argument that versions of an agreement that were passed back and forth--over email or otherwise—could be considered legally-binding contracts, even without there being a final approved and signed version. Therefore, it is recommended that the seller include language making it clear that the document draft is not an enforceable contract until and unless both parties have executed the final version of the agreement.