The Purchase and Sale Agreement

AuthorGregory M Stein - Michael D Goodwin - Morton P Fisher Jr
The Purchase and Sale Agreement
§ 2.01 The Need for a Purchase and Sale Agreement
The operative document for transferring real estate is a deed, not a
contract. Deeds are usually short—generally just a few pages—and
simple, with language mandated by state law or established by local
custom. Any property owner can convey real estate in the time it
takes to sign a deed before a notary public, but most purchasers of
real estate, and commercial investors in particular, are not impulse
buyers. These investors need time to confirm that the seller really
owns the property, to locate financing on favorable terms, to
investigate the physical condition of the property, to verify that the
tenants have signed leases at certain rental rates, and to perform an
array of other investigations. Buyers do not wish to spend time and
money on these tasks only to have the owner sell the property to
someone else. They need to ensure that, for a period of time, they
can perform all of this due diligence work with certainty that the
property is theirs if the property is as desirable as the seller claims it
is. Similarly, the owner does not want to commit the property to the
buyer only to have the buyer back out months later because it gets
cold feet or finds a better deal elsewhere.
In short, each party wants the other party to be committed to pro-
ceed as long as things turn out consistent with their respective expec-
tations. The parties typically accomplish this result through the use of
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an executory contract, in which each party promises to perform in the
future if certain conditions precedent are met. The buyer promises to
pay an agreed price for the land as long as it receives certain informa-
tion about the property and finds the property and the information
to be acceptable. The seller promises to deliver title to the buyer in
return for payment of the purchase price. Each party desires as much
flexibility as possible for itself, particularly when addressing unfore-
seen circumstances, while simultaneously wanting the other party to
be as irrevocably committed as possible.
Comment: On occasion, this book will use terms such as “demand,”
“insist,” “require,” and “should” when describing the positions a party
might take on various issues. The practitioner should understand these
terms in the context of each transaction, tempering her positions with a
practical view as to what is important to the client; how to reduce risk
without losing the transaction for the client; and—most significantly of
all—what the relative negotiating leverage of the parties is. Generally
speaking, the party who wants or needs the transaction the most has the
least negotiating leverage. Only a party with the strongest negotiating
leverage can “demand,” “insist,” or “require.” All others can only “pro-
pose” or “request.”
Comment: Certain “hot-button” issues are deal breakers for buyers or
sellers. The lawyer should learn from the client early in the transaction
what these issues are. This knowledge may save the client time and
money it otherwise might spend on futile negotiations.
In a typical commercial transaction, the parties will sign a
purchase and sale agreement several weeks or months before the
seller is scheduled to deliver title to the buyer. In some cases, this
executory period may even last for years if the buyer needs to
obtain a permit to develop the property or needs a rezoning. The
purchase agreement will disclose certain information to the par-
ties and allow them the opportunity to gather other information
on their own. It will list exactly what conditions each party must
meet before the other party is obligated to perform. It will allocate
a variety of risks between the parties. It will serve as a road map
for the time until the closing by spelling out the obligations of each
party. Finally, it will provide remedies that each party may exer-
cise if the other breaches.
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The Purchase and Sale Agreement 13
Comment: On occasion, the parties may decide to enter into an option
agreement instead of a purchase and sale agreement. Under an option
agreement, the buyer may choose whether to perform, and the seller is
bound if the buyer so elects. For obvious reasons, some sellers may be
reluctant to enter into option agreements. While there are important
legal differences between an option and a purchase agreement, there may
end up being little practical distinction between the two if the purchase
agreement contains numerous broad closing conditions that the seller
must meet or provides that forfeiture of the earnest money deposit is
the seller’s sole remedy if the buyer defaults.
§ 2.02 Buyer’s Perspective
The purchase agreement is not always as reciprocal and evenly
balanced as the preceding section may have made it sound. In most
cases, the seller knows a great deal more about the condition of the
property than the buyer does. For this reason, the buyer will use the
purchase agreement as a way of unearthing as much information
about the property as it can. In particular, the buyer will seek to
persuade the seller to represent certain facts about the property in
the agreement. The buyer will also use other tools in the purchase
agreement, such as seller covenants and closing conditions, to shift
to the seller risks that relate to the property.
The traditional rule of caveat emptor (buyer beware) survives about
as strongly in the law of commercial real estate as it does anywhere in
the law. Sellers of commercial property usually have few disclosure
obligations.1 This rule does not, however, allow the seller to misrep-
resent the condition of the property. The more disclosure the buyer
seeks during the negotiation of the purchase agreement, the more it
will learn about the property. If the seller is unwilling to represent cer-
tain facts about the property in writing, then the buyer will wonder
why and will undertake its own investigation or will refuse to sign the
purchase agreement. If the seller makes a representation that turns out
to be untrue, then the buyer will be able to enforce its rights under the
agreement, which may include the right not to close and the right to
seek contractual damages. Thus, the buyer, who typically knows far
less about the property than the seller, uses the purchase agreement
and the negotiation process leading up to it as investigative tools.
The buyer will also use the purchase agreement as a means
of obtaining information on its own. For example, the buyer must
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