Purchase Agreement – Buyer Considerations

Commercial Real Estate Toolkit

Purchase Agreement – Buyer Considerations

After a buyer and seller are on the same page with the key business terms of a commercial real estate purchase and sale, the next step is for the parties to draft and negotiate a purchase and sale agreement. Below are some key considerations for buyers.

A buyer needs to be sure that there is a way to get out. The agreement should contain provisions that allow the buyer to terminate the agreement and receive a refund of any earnest money deposit in any of the following events: (1) the property is not acceptable or satisfactory financing is not available; (2) there are unacceptable title defects; (3) the seller’s representations and warranties are untrue; (4) the seller fails to satisfy the conditions of closing in a timely manner; or (5) the seller breaches the agreement.

A buyer needs adequate due diligence provisions. The agreement should allow the buyer to thoroughly inspect the property and obtain all pertinent documents about the property in the seller’s possession. The agreement should give the buyer a sufficient period of time to perform the inspections and review the documents before earnest money becomes non-refundable.  Obtaining an Environmental Phase I Site Assessment for a property can take around 30 days, and if the property shows signs of possible contamination, further testing can take another 30 days or longer after that. 

A buyer needs clear title. The agreement should give the buyer an opportunity to review the current state of title to the property. This can be achieved by reviewing a current ALTA/NSPS survey of the property, and all documents that are shown as exceptions on the title commitment. The agreement should establish a procedure giving the buyer the ability to object to any adverse conditions disclosed on the survey as well as any title defects disclosed in the title commitment. The closing should be conditioned upon a title company committing to provide title insurance that is satisfactory to the buyer.

A buyer needs to know if the seller is in default under any leases. If the property is leased to commercial tenants, the agreement should contain provisions that require the seller to obtain estoppel certificates, and if the purchase will be financed by a lender, subordination non-disturbance and attornment agreements, signed by each tenant prior to closing. The lender may not be willing to fund the loan without these documents in hand. This process can also flush out any unfulfilled promises that the seller has made to tenants, so that the buyer can require the seller to fulfill them prior to closing.                

A buyer needs to limit its liability. The agreement should limit the buyer’s liability in the event of a default to the earnest money deposit.  The last thing a buyer wants is for the seller to declare the buyer in default and seek to force the buyer to purchase the property, or to seek damages against the buyer for its failure to close.

Keep in mind that there is no such thing as a “standard form” when it comes to commercial real estate. These are just a few of many concepts a buyer should look for in an agreement. A form of agreement that may be appropriate for one transaction, may be inadequate or overkill for other transactions. For this reason, the agreement should be drafted and negotiated on the buyer’s behalf by an experienced commercial real estate attorney.

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