Do You Recognize These Common Blocks To Purchase And Sale Agreements?

Dec 21, 2016

Once due diligence is completed and the purchase proposal is agreed upon, you and the seller will be ready for the final step – the purchase and sale agreement.

At this point, it’s essential to involve your lawyer and your real estate broker, as purchase and sale agreements are exceedingly detailed. However, there are several important factors that you’ll want your real estate attorney or real estate broker to address even before you and the seller sign a PSA.

How To Avoid Receiving Last Minute Data

There is often pressure from the seller to finish the agreement as quickly as possible. In order to expedite the sale and ensure confidentiality, most sellers now use electronic data rooms in order to transmit information to the buyer.

However, while electronic data rooms are an excellent solution for providing access to secure information, there is still room for improvement, particularly with regards to notifying buyers when new information is uploaded.

At present, sellers are not required to notify buyers when new material is uploaded. Furthermore, once a buyer accesses the data room, there is no easy way to go straight to the new material if you don’t know the exact document that was uploaded.

This often results in unpleasant surprises for buyers, as they discover – sometimes on the day, the Purchase and Sale Agreement is meant to be signed – crucial information that impacts on the agreement. To avoid this, buyers should require sellers to notify them when new materials are added to the data room, and should also specify a final date when items may be added before the execution of the Purchase and Sale Agreement.

In addition, since sellers vary greatly in the type and amount of material they provide, buyers should insert a condition allowing them to require more materials if needed, as long as the information requested is material to the operation of the property.

Prevent “Purchase And Sale Agreement Comment” Discrimination

There is usually more than one buyer during the Purchase and Sale Agreement study period. Although it’s essential your lawyer review the PSA and comment based on your investment goals and issues revealed during due diligence, it does occur that sellers will evaluate buyers based on the comments left on the PSA.

prevent purchase and sale agreement comment discrimination

They will then choose the buyer they feel will not only offer them the best deal, but that will present the least problems during the sale. Assuming all things are equal, these will obviously be buyers with the fewest Purchase and Sale Agreement comments.

In order to walk the line between too many comments and too few, some buyers will ask lawyers to minimize all comments.

A better solution would be to hire a lawyer early on to look at the Purchase and Sale Agreement and decide what comments are relevant. Once a comprehensive list is written, the attorney and buyer can review the list, choose the most important comments, and then distill them into a version more palatable to the seller.

Make Sure Tenant Estoppels Don’t Require A Specific Number Of Tenants

Tenant estoppels are a common source of contention between buyers and sellers. Buyers would prefer to have as many estoppels as possible, covering every fact or detail possible…while sellers would rather provide as few as possible.

In order to up the number of estoppels they receive, buyers will sometimes insist on a particular number of estoppels. However, this can present a problem if a seller then provides estoppels from the smaller tenants instead of from the anchor ones.

Of course, the anchor tenants are more likely to reveal issues they may have had with the previous owner or with the property, which is one reason why sellers resist giving tenant estoppels in the first place.

Buyers should resist the temptation to ask for a specific number of estoppels, and ask for estoppels from major tenants with a certain percentage – according to leasable space – of the smaller tenants.

Do You Need A Rent Roll?

Although it’s possible to make do with tenant leases and estoppels, it is still advisable to try and get a rent roll if the seller will agree to provide one, since rent rolls can provide information on environmental issues, municipal violations, and service contracts.

rent rolls have valuable info about the property

In a related vein, it’s wise to consider the rights of each party in regards to uninsured losses. For example, what happens if there is a casualty before the sale is completed? Immediately after the sale is completed? If the losses are uninsured, will the buyer have the right to cancel the deal if credit is not given at closing? And if the loss is insured, who will be responsible for the deductible, and the insurance proceeds?

Don’t Forget To Include A “Long Stop Date”

Both buyers and sellers should ensure a long stop date, which allows them to leave the deal without repercussions if things drag out, is included.

The long stop date should also specify the preconditions under which the agreement must be conducted in order for it to be valid. In the event that the preconditions are not met, or the long stop date passes, both parties can end the agreement.

Looking To Buy Commercial Property?

Find out why triple-net lease real estate investments should be part of your investment portfolio.