Have you ever wondered when signing a boiler plate purchase and sale agreement what paragraphs on the PSA have the potential to come back and haunt you before the sale is complete?
I recently attended a Commercial Association of Brokers sponsored seminar on this subject. The speaker was Daniel Drazan a real estate attorney for Dunn Carney Allen Higgins & Tongue, LLP. Dan serves on the Board of Directors of the Commercial Association of Brokers. He also chairs the CAB Legal Forms Committee so he is well qualified to speak on this subject.
Here are four potential issues that buyers should do their best to negotiate away before they sign the purchase & sale agreement.
TRAPS FOR BUYERS
Avoid Calling Earnest Money Non-Refundable
Define the terminology correctly. “Hard” or “non-refundable” is not technically correct because in certain situations the earnest money deposit is refundable. It still remains refundable if Seller fails to perform its obligations, the property is condemned, or there is a failure of a specific closing condition.
Unacceptable Title Exceptions
As soon as possible, carefully review all exception documents in the preliminary title report including CC&R’s, easements, etc. Have the right to terminate the PSA if there are title exceptions that are unacceptable to Buyer.
Notices to Seller Identified in Purchase & Sale Agreement
In a rising commercial real estate market, like we are experiencing now, sellers may want to cancel the purchase & sale agreement because a higher sales price has been subsequently received since the PSA was signed. To avoid this from occurring, buyers need to comply with specified deadlines for notifying the seller of compliance with the terms of the PSA. Avoid missing any deadlines so that the seller cannot use a missed deadline as a pretext to cancel the PSA.
Unreasonably Short Financing Period
This is one of my pet peeves because it affects me, the mortgage broker. I am always baffled why a buyer would agree to remove the financing contingency within 45 days or less of signing the purchase & sales agreement.
The reason a buyer uses a mortgage broker is to get the best possible financing for the property. This requires shopping the market. A preliminary loan package cannot be sent to lenders until the historical operating statements and current rent roll are released by the seller. The release of these documents usually occurs a couple of days after both parties sign the PSA.
So the earliest a loan package can be sent to prospective lenders is 3 days after signing the PSA. It takes about 7 to 10 days for lenders to respond with a letter of interest. The buyer then chooses a lender and signs their LOI. It generally takes 45 to 50 days from signing the LOI to receiving loan approval. It takes another 10 to 15 days to close. Adding up all the days to get to loan approval requires a minimum of 55 days to receive loan approval and 65 days to close. It’s not uncommon that it takes a week to 10 days more.
If the buyer must accept an unreasonably short financing period or lose the deal, make sure to negotiate extensions with a reasonable increase in earnest money.
Here are three potential issues that sellers should do their best to negotiate away before they sign the PSA.
TRAPS FOR SELLERS
Do not allow Buyer to use, “and/or assigns.”
The phrase “and/or assigns” is too ambiguous and could result in selling the property to an unknown third party that may not be acceptable to Seller. Instead cover the assignability specifically in the Purchase and Sale Agreement. One scenario would be to allow Buyer to assign the purchase & sale agreement to a party controlled or owned by Buyer. This would allow Buyer to form a new single asset entity to own the property that is under Buyer’s control. It would not allow Buyer to assign the PSA to a third party that is not under the control of Buyer.
Earnest money strategies
Seller should require cash earnest money, not a promissory note, and make the amount substantial. This assures Buyer is serious and has good financial resources. Seller should also require additional earnest money for extensions of the due diligence period and make sure the earnest money is as “non-refundable” as possible.
Phase II Environmental Site Assessment
If a Phase II ESA is needed Buyer should be required to provide a copy of the report to Seller. Seller should also have the right to determine the scope of the Phase II and the choice of environmental consultant. If allowed by law Buyer should be required to keep the results of the report confidential.
In order to achieve an optimal outcome when buying or selling a property, negotiate on those issues that are most important to you prior to signing the Purchase & Sale Agreement.
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Should you want to contact Daniel Drazan his contact information is below:
Dunn Carney Allen Higgins & Tongue, LLC
851 SW Sixth Avenue, Suite 1500
Portland, OR 97204