What is a Commercial Purchase Agreement?
A commercial purchase agreement is a legally binding contract between the buyer and the seller of a commercial property. This document lays out the terms of the sale in an unambiguous fashion. Each party typically has legal representation during the drafting and agreement process, which is important because the agreement is a legally binding contract.
The purpose of a commercial purchase agreement is to define the nature of the transaction and detail the rights and obligations of each party during the entire transaction timeline . The commercial purchase agreement will include the terms of the transaction and establish a timeline for its completion, which can be anywhere from 60 days to a year or more, depending on the type of transaction. It will also address important details such as contingencies, financing, and conditions for closing. A commercial purchase agreement is in many ways similar to a residential purchase agreement, except the terms will vary greatly for commercial properties, particularly hotels, industrial buildings or blocks of condos in a development.
Key Components of a Commercial Purchase Agreement
A typical commercial purchase agreement for the sale of a business will contain the following elements:
Parties. This section identifies the seller and the buyer and defines each party’s legal name. If the seller is a business entity, such as a corporation or limited liability company, the seller’s legal name must be used. If there is a title to real estate included in the sale, a legal description of the real estate must be included.
Purchase Price. This section provides for the price paid for the business, a breakdown of the price into those assets being sold and assumed liabilities, and the method of payment. For example, the seller may receive cash at the closing date and/or seller-financed pay-out over time.
Payment Terms. This section describes the deposits, notes, and other instruments that comprise the purchase price, including interest rates, due dates and any prepayment penalties. It also refers to escrows that may be required for taxes, rent, etc.
Warranties. Here, the buyer will be looking for representations made by the seller relating to its company that make up what the business is worth to the buyer. Warranties relate to ownership of assets, authority to sell, compliance with laws, pending or threatened litigation, tax liability, etc. The list can go on and on, but they should be based on the facts relevant to the transaction.
Negotiation of Commercial Purchase Agreements
Negotiating a commercial purchase agreement is a critical step in the buying or selling process that can make or break the entire transaction. An effective strategy is essential for ensuring that you have the leverage necessary to secure favorable terms and conditions for your deal. When a commercial property is under consideration for purchase, it’s important to carefully weigh all of the options that are on the table before deciding to move forward with negotiations.
Depending on your current situation, it may be your priority to simply get the deal done, so you can move on with uncertainty behind you, or it could be more crucial to you to maximize profitability. No matter what business objectives you have, there are always ways to negotiate a deal that is fair for both parties and meets the needs of each. This isn’t to say that the negotiating process is easy or that disputes or disagreements won’t take place, as they often do. You need to be able to approach negotiations with a clear goal and read the situation accordingly.
A skilled real estate attorney should be an integral part of the negotiations and should be involved throughout the entire process. A great advisor will be able to study the situation and make strategic decisions, as well as advise you on how to reword or rephrase certain terms or conditions if they are causing problems in negotiations. In some cases, even the most skilled negotiator may get caught up on something that can’t be worked out without having some outside help.
Finally, before signing off on any deal, be sure to have a legal expert review the commercial purchase agreement to ensure that its terms and conditions are not only favorable right now, but will be into the future, as well.
Common Issues Found in Commercial Purchase Agreements
Occasionally, even in the most well-appointed documentation, buyers and sellers may encounter problems that arise from the purchase agreement itself. Problems with the underlying intent to the purchase agreement or the financial aspect of the deal can also pose problems down the line. Here are a few areas of common challenges in forming and executing the commercial purchase agreement.
Closing Delays As with most transactions, last-minute issues and delays can pile up and threaten a successful close. It is very important that the purchase agreement define the closing date, who will be present, and what happens if the deal is terminated. It is also ideal to define all instances in which either party can be held liable for damages to the other should the deal be called off under the terms of the purchase agreement.
Unresolved Contingencies The terms of the purchase agreement may not be acceptable to all parties involved. Financing contingencies, due diligence, and post-closing contingencies should be defined in the agreement language, and should all be resolved prior to the closing of the transaction.
Disputes Over Deal Terms It is common for misunderstandings and complications to occur during the final review of the commercial purchase agreement. To help minimize the chance of errors, have an attorney look over the document and all its provisions. An experienced lawyer will not only be able to catch problems in the document itself, but will also highlight sections that could be the source of contention between parties should there be an issue later.
Relevant Jurisprudence and Regulation
From a compliance standpoint, commercial purchase agreements, unlike many other contracts, frequently are subject to regulation. For example, if a business is purchasing an interest in an entity that is a licensed entity (a bank, a broker-dealer, or a financial institution, for instance), the agreement may be subject to the approval of one or more regulatory agencies with jurisdiction over the transaction. Equally, if the seller of the business has any licenses, particularly in the regulated areas of banking, the securities industry, or insurance, the terms of the purchase agreement often must be approved by the relevant authority and may be subject to review by the SEC or FINRA.
As an example, FINRA Rule 1017(a) provides that:
No member firm shall permit any person to become associated with it in any way unless, before permitting such association to commence, such member firm has submitted to the district office in writing and in the form prescribed by the Corporation the following information: (1) the name, residence address, occupation and, if a person, any business affiliations within the preceding two years of such applicant; (2) a list of all foreign countries in which such applicant is or has been registered, licensed or qualified to conduct the securities business so as to be subject to the jurisdiction of the securities regulators of such foreign countries; (3) a statement whether any person or organization will be beneficially interested , whether directly or indirectly, in the business to be conducted by such applicant; (4) such further information and documents with respect to such applicant, if a person, and with respect to such applicant’s proposed employment, if such applicant is to be employed by an existing member firm, if the applicant will have a direct involvement in the business to be conducted by the member firm and if such member firm is receiving compensation with respect to such employment of such applicant, as the Corporation may request.
Agreements that require the approval of a regulatory body are often more complicated than standard commercial purchase agreements because these agreements often define parties, the consideration to be paid, the representations and warranties, the covenants both sides are making, closing conditions, and indemnification obligations, but these agreements also commonly cover reserve capital requirements and limitations on business that the buyer may operate (and may be subject to review by the relevant authorities).
Further, there may be restrictions or prohibitions in other areas of law, such as federal and state antitrust laws, that need to be considered if the proposed purchase involves businesses with overlapping customer bases or other competitive interests.
Commercial Purchase Agreement Best Practices
To ensure the protection of the interests of all parties involved, such as the seller, buyer and any lienholders or contractors, careful drafting of the commercial purchase agreement is essential. Here are certain best practices to consider: Define All Important Terms – As much as possible, avoid language that can be interpreted in multiple ways. For example, use "Month-to-Month" instead of "Flexible Term." If any common terms are being used in an uncommon way, define those terms at the front of the commercial purchase agreement. Qualify All Statements by Seller/Buyer – All statements made by the seller and buyer, as well as third-parties, should be qualified as "To the best of seller’s knowledge" or "To buyer’s knowledge." This way, it will be understood from the outset that no one is making any guarantees about any statements made that concern facts that are not already known.
Clarify Performance Obligations – If one or more parties are obligated to take specific actions outside the provisions of the Uniform Commercial Code (UCC), their performance obligations should be clearly defined. This should include details such as when these actions should be taken, what conditions apply, what will happen if these conditions are not met, etc. Any contingencies should also be detailed, including the process of deciding whether a contingency has been met.
Ensure Consumer Protection Compliance – If the commercial purchase agreement is between two non-consumer parties (i.e., B2B), it should be specified as such in order to avoid FTC scrutiny. In addition, certain aspects of the agreement may have to be detailed in order to comply with applicable consumer protection laws. These are some of the overall best practices you should follow when drafting a purchase agreement for commercial property. While you can incorporate your own state’s laws as necessary, you should generally have protections in all areas detailed at the outset to avoid any future disputes.
Case Examples of Commercial Purchase Agreements
To illustrate some of the practical applications of the commercial purchase agreement, consider the following:
Example 1: Office Condo Purchase
A local real estate investment group recently decided to purchase an office condo in a recently converted office/retail property. The real estate investment group placed an offer on a market rate office condo in a prominent location along a major interstate highway. After the seller accepted the offer, real estate investment group began to review the purchase agreement with its attorney. The attorney was able to identify several key issues relating to, among other things, zoning and permitting issues. Several zoning for the property had recently changed. The property was also subject to restrictions as to use based on the location of other nearby properties. The attorney was also able to identify other concerns relating to the purchase price and financing . The sale price would be higher if the property was not subject to a certain mortgage lien. The sale was successfully completed after these terms were negotiated and the deal closed.
Example 2: Restaurant Purchase
A new restaurant owner recently purchased a commercial restaurant in the heart of a local suburban community. After the initial purchase and prior to the closing the owner was able to negotiate a variety of conditions that were beneficial to operate of the restaurant. Through the commercial purchase and sale agreement, the owner was able to receive allowances from the property for renovations. Because the property was previously owned by a popular chain restaurant, the owner was able to get concessions for necessary renovations. The owner of the restaurant was also able to negotiate additional conditions for free parking for one year from the date of the purchase. With these negotiated clauses in the purchase agreement, the new owner was able to open with minimal delay.