Protect Your Investment: Purchase and Sale of Commercial Real Estate
February 3, 2021
by Cody W. Lyons
Commercial real estate purchase and sale agreements, or PSAs, often appear overwhelming and complex, typically consisting of numerous pages of contingencies and 6-month or greater due diligence periods. Therefore, it is imperative to protect your interests at the outset, whether you are acting as a purchaser or a seller of commercial property. There are always obvious points of contention between a purchaser and a seller of real estate: Purchase price, due diligence period, contingencies, etc. Nonetheless, certain methods may be employed to protect a purchaser or seller that do not necessarily generate opposition or controversy from the other party to the transaction.
As a prospective purchaser, after finding and analyzing a property and coming to an agreement with the seller on a purchase price, you will typically execute a PSA with the seller. The PSA should include a detailed “script” of the events, timelines, and requirements that lead up to the eventual closing and conveyance of the property to the purchaser. Apart from standard market and economic forces, purchasers of commercial property face a number of additional risks that can quickly ruin an investment, including zoning issues, hazardous substances, appropriate utilities, building permits, and additional government regulations. It is important to address these sorts of risks in the PSA and reserve the right to walk away from a deal if one of these unexpected problems arise.
In a commercial real estate deal, it is not uncommon for the PSA to afford the prospective purchaser 120 days or more of due diligence, allowing the purchaser to walk away for any reason and retain any earnest money it has deposited during that time period. In addition to the standard due diligence period, it is advisable to include in the PSA a provision which allows for an extension of the due diligence period by depositing additional earnest money. As an added layer of protection, a purchaser should include certain contingencies that survive the expiration of due diligence, such as receiving appropriate government approval, granting of land disturbance permits, and rezoning contingencies, with the failure to satisfy such contingencies allowing the buyer to terminate the PSA and retain all earnest money. It is important to clarify in the PSA that the purchaser shall retain all earnest money deposits in the event that a contingency has not been met; this is especially important in situations where the PSA is terminated due to an unsatisfied contingency after the due diligence period has expired.
When on the selling side, it may be easy to believe that after receiving a full price offer, the deal is destined to close without further negotiations or problems from the buyer, yet it has become relatively common practice for prospective buyers to get a commercial property under contract with no intention of ever closing on the transaction. These individuals and entities will oftentimes execute a PSA with a seller with the sole intent of selling or transferring the PSA to another purchaser for a hefty “finder’s fee.” More times than not, the prospective purchaser is unable to find a buyer and the seller is stuck with its property under contract until the prospective buyer eventually terminates the PSA in the final days of its due diligence period. A seller may protect itself from this type of activity by including a non-assignment clause in the PSA. If you are dealing with a prospective buyer who actually intends to purchase the property, they will typically have no issue with agreeing with such a non-assignment clause.
Sellers must also be wary of purchasers who are not motivated to close the deal quickly. Sellers may weed out unmotivated purchasers, for example, by requiring non-refundable monthly payments every month after the expiration of the due diligence period. A buyer will generally require these payments be applied to the purchase price at closing, but so long as the buyer is required to make payments on a property they do not yet own, the buyer will be much more inclined to move quickly on closing the deal. Another essential item sellers should have in their PSA is an “outside closing date.” An outside closing date is a term used to define the final date that a purchaser has the right to close on the transaction. The inclusion of an outside closing date will protect sellers from the troublesome experience of having a property under contract for years on end, as the buyer must close by a specific date or risk losing its earnest money and any periodic payments.
Beyond the communications between the parties in preliminary negotiations, arguably the most important aspect of a commercial real estate PSA as a buyer is the ability and circumstances which allow you to terminate the agreement and retain your earnest money. Conversely, as a seller, it is paramount to protect against deceptive and unmotivated purchasers by locking them in with a number of deadlines, reporting requirements, and periodic non-refundable payments. Whether you are on the buy side or the sell side of a commercial real estate transaction, it is always advisable to seek knowledgeable legal counsel in order to afford yourself the utmost protection under any PSA.
Cody W. Lyons is an attorney at Flint, Connolly & Walker LLP and currently represents individuals and businesses in numerous corporate and real estate matters. Cody routinely advises investors, sellers, and lenders on negotiating and structuring real estate and corporate transactions. Cody is also a business owner and real estate investor and has knowledge and experience with various asset acquisition and exit strategies, including note purchases and assignments, stock purchases and sales, tax sales, estate acquisitions, and foreclosure sales.