Commercial Property Sale Agreement: What is it?
A commercial property sale agreement is a legally binding contract that outlines the terms and conditions of a real estate transaction involving commercial property. The primary purpose of a commercial property sale agreement is to protect both the buyer and the seller during the sale process and to ensure that all parties are in agreement on all aspects of the sale, from the sales price to any contingencies that may be in place.
A commercial sale agreement typically includes key information such as the legal property description, a detailed list of all property contents that will be sold along with the property, and any contingencies that must be met prior to closing the sale , such as financing approvals or zoning changes.
The use of a commercial property sale agreement is essential to protecting both the buyer and the seller during the sale process. For the seller, the commercial sale agreement provides protection against a buyer who attempts to extract more concessions than those outlined in the agreement. In addition, the commercial property sale agreement also provides assurances to the seller in regards to the sale process, providing them with a clear outline of what they can expect during the process. For the buyer, the sale agreement serves to itemize any concessions and protections that the seller has provided them.
Essential Components of a Commercial Property Sale Agreement
A commercial property sale agreement can be quite complex and often takes time to negotiate and agree on particular terms. While each agreement will be drafted differently as every sale transaction is different, the following outlines the key elements to a commercial property sale agreement.
Details of the property being sold – the address, land title, improvements on the land etc. Purchase price and how it is to be paid – there may be deposits and/or progress payments to be made at specific times on a sale agreement. Deposit, which is generally held in the trust account and released according to the terms of the sale agreement. Date of possession – there is generally no possession of the property until the purchase price has been paid in full at the settlement date. Timeframe for settlement – this is often a negotiation between the parties. Depending on the circumstances, it can be anywhere from a few weeks to several months. It allows the buyer time to complete a range of checks and for the buyer’s bank to obtain approval of the loan. Any special conditions which are negotiated by the parties – Up to two conditions are often negotiated but there is usually a cut-off date for meeting these conditions.
Legal Aspects of a Commercial Property Sale Agreement
When dealing with commercial property, the complexities of the sale process can be daunting. A commercial property sale agreement is not just a simple handshake deal; it’s a legally binding contract that must adhere to various laws and regulations. Drafting such an agreement requires a careful understanding of the legal considerations involved.
One crucial aspect is due diligence. This is the process where a prospective buyer does their homework before inserting their name on the dotted line. They will likely conduct inspections, review title information, and evaluate the property’s zoning and potential for future development. It is essential for the buyer to outline all necessary contingencies in the sale agreement to ensure they have the opportunity to complete this investigation without being bound to the sale if issues arise.
Zoning laws also play a significant role. Depending on the location and type of commercial property, zoning may significantly affect the transaction. It determines how the land can be used, what type of business can operate there, and can affect the property value significantly. It is vital to verify that the property complies with local zoning regulations, or understand the process for changing its zoning, before finalizing the sale.
Moreover, compliance with building codes, environmental regulations, and other federal, state, and local ordinances is paramount. For example, commercial properties must comply with the Americans with Disabilities Act (ADA), which sets standards for accessibility for people with disabilities. The buyer should be aware of any code violations, as they may become the buyer’s responsibility after the sale.
Finally, factors such as financing contingencies, earnest money deposits, and date for closing are also important legal aspects that need to be detailed in the sale agreement.
Typical Provisions of a Commercial Property Sale Agreement
Often included in commercial property sale agreements are contingency clauses, which allow for a contract to be voided if certain conditions are not met. One common example is a financing contingency, under which a buyer would not be obligated to proceed with the sale if they are unable to secure financing for the property’s purchase. Other, more complex, contingencies could include the buyer’s right to continue environmental assessments or other evaluations after the agreement is signed.
Inspection periods are another popular clause you will find in commercial property sale agreements. Often, sellers will agree to a certain period of time where the buyer can conduct its own inspection(s) of the property, in order to verify that the property’s condition is as advertised. If the seller is not amenable to the terms of a buyer’s inspection period, it is possible that the buyer may choose to withdraw from the agreement.
Closing cost responsibilities, including who will pay which costs at the time of closing, is also often set out in boilerplate commercial property sale agreements. The distinction between the buyer’s and seller’s collective obligations can get complicated quickly, depending on the nature of the transaction.
Each of these clauses and many others should be carefully examined before entering into a real estate transaction. What seems like an innocuous clause to a layman can actually have massive consequences should a sale move forward, which is why it is important to examine the fine print and ask questions to your real estate agent (or hired legal representative) prior to entering into a sale agreement.
Finalizing a Commercial Property Sale Agreement
Once you have a commercial property sale agreement in place, you will likely need to meet a number of steps to finalize the actual transaction. These steps will vary slightly based on the type of commercial real estate and the specific parties involved, but generally speaking there are some best practices you should follow throughout.
Negotiation process
Keep in mind that you will need to meet with the buyer and negotiate out your due diligence items. For example, in commercial leases, making sure that the landlord keeps the leases from expiration (or pays the tenants the difference), is key. With a more traditional property, you will want to confirm that there are no other significant encumbrances imposed on the property, and that the sale is free of all liens and encumbrances—this means that the mortgage or any other liens that may affect the property need to be cleared from title. You must determine when the buyer is required to perform due diligence, what inspections can be performed , and what due-diligence period you would have to right to walk away from the deal after the buyer’s tests.
Due diligence
Depending on the property, due diligence may include an environmental report, assessment of soil, property inspections, and zone changes. These inspections can be complicated, and items will come up that you have to address.
Adjustments
Adjustments involving items like real estate taxes, utilities, fuel and rent should be negotiated before the deal closes. These adjustments are essential to making sure that the seller and the buyer share a fair distribution of these costs.
Closing
After the inspections and diligence are completed, and the terms of the sale have been negotiated, a closing and funding meeting will need to take place. At this meeting, you will be required to execute a number of agreements, affidavits, instruments, certificates and applications—all of which transfer title to your property. On the other hand, the purchaser will be expected to fund the purchase price of the property.
Common Issues in a Commercial Property Sale Agreement
Through our work in the sale and purchase of commercial property we have seen some recurring mistakes in commercial property sale and purchase agreements. Some of the most common are listed below:
- The Agreement makes no provision for an environmental audit or inspection of the property. Purchasers are often ill-advised by their real estate agents to simply enter into the sale and purchase agreement without first conducting any environmental audit or inspection. If you were buying a house, this would not be acceptable; nor should it be acceptable when buying commercial property.
- No special conditions dealing with GST are included in the Agreement. It is now a part of life (unfortunately) that a vendor is liable to pay GST unless he can satisfy the Commissioner of Taxation that he is registered for GST or otherwise entitled to receive the GST from the sale. Thus, if a cash flow positive transaction is required, you can lose thousands of dollars very quickly.
- Lack of an urgent pick-up clause for deposit cheques. It is important to draft a clear urgent pick-up clause so that you can recover any cheques which unnecessarily delay settlement. Otherwise you are vulnerable to vendors (and their solicitors) holding up settlement to gain leverage to extract further settlement conditions.
The Importance of Legal and Real Estate Expertise
While a sale agreement can be drawn up without signing the buyer and seller using a lawyer or real estate agent, doing so would be unwise. Like the purchase agreement on residential property, the commercial property sale agreement can be complicated and involves high dollar amounts and monetary investment. The payment structures are sometimes also more complex when considering the closing down of a business, waiting periods and large capital gains attached to sale.
These are just some reasons why the sale agreement should be drawn up by an experienced and qualified legal representative and a real estate professional when appropriate. As the seller you must ensure that all terms are fully understood , terms are clear and it is a good idea to ask for legal advice and advice from your real estate professional on how the sale price was arrived at and how it compares with similar properties in your area.
While you may have done the process of selling a house yourself previously it is unlikely that your foray into the world of commercial property sales would be a similar experience. There is a lot more room for problems with a commercial property sale and an experienced commercial real estate lawyer can help you to avoid the issues.
