A commercial real estate purchase agreement (also referred to as a CRE purchase agreement) outlines the rights, obligations, and liabilities of each party involved in the purchase and sale of real estate. The agreement also describes the property being conveyed and the steps that should take place before the close of the transaction.
A commercial real estate purchase agreement is used by individuals intending to sell or buy commercial real estate, either as an investment or to meet their commercial or business needs. A commercial real estate purchase agreement can be one page or hundreds of pages long. Despite the urge to keep the commercial real estate purchase agreements short and simple, its length should not be the primary consideration but rather the effectiveness and efficiency of the contract, to avoid conflicts from before and after closing.
Almost all of the terms of a commercial real estate purchase agreement are normally up for negotiation. One of the multiple terms of a commercial real estate purchase agreement is the contractual requirement of the buyer to pay earnest money (commonly referred to as consideration), which is usually 2-5% of the purchase price, for the agreement to be valid.
Additionally, other provisions must appear in a Commercial Real Estate purchase agreement. The parties’ responsibility is to ensure they are included, for they are meant to protect their interests.
Types of Commercial Property
There are different types of commercial real estate property. Some of the common examples include;
- Apartments (more than four units) – Apartments are typically low-rise buildings situated on a single piece of property.
- Hotel – a hotel is an establishment where accommodation, meals, and other services are offered.
- Industrial – Industrial properties are used for heavy manufacturing, light assembly and include warehouses.
- Office – Offices are buildings partitioned to accommodate the administrative activities of a business.
- Land – Land as a commercial property undeveloped land such as farms, ranches, etc.
- Retail (shop, restaurant, etc.) – Retail property is rented out to different businesses to be centers of operations for the different ventures, for example, malls.
These types of commercial property cater to different investment needs. However, their conveyance through a commercial real estate purchase agreement does not differ; variation only comes in the terms and conditions. A Commercial Real Estate Purchase agreement is part of the purchasing process. It can be created by either the buyer or the seller and can be a standard format or the outcome of back-and-forth negotiations.
The buyer and the seller usually negotiate and agree on a mutually beneficial offer and write down the terms and conditions of the agreement. The commercial real estate purchase agreement is signed before any payment is made or property ownership is transferred. Once signed, it becomes legally binding and remains valid till the closing date, unless it is terminated before closing.
How to Write
Commercial property sale and purchase is a detail-oriented process with many legalities and formalities involved, therefore, commercial real estate purchase agreements must be professionally written and structured. To demonstrate how to achieve this, this section will look into the various components of a commercial real estate purchase agreement step by step describing how they should appear in the agreement.
These components are mentioned below:
The first component to be declared is the date when the commercial real estate purchase agreement was created and then the parties involved are identified. The effective date should show the exact day, month, and year the agreement was formulated. Next, indicate the legal names of the buyer and the seller accordingly and indicate their mailing addresses down to the street address for specificity. Finally, if the buyer is an entity, the official operating name of the business should also be included.
Secondly, the commercial property should be identified by providing a legal description. The description should show the property classification (type), street address, tax parcel information, and any other information that can be used to identify it. The information provided in this section should be accurate.
Next, the Commercial Real Estate purchase agreement should list any personal property being traded through this transaction. For example, such property could include prepaid advertising displays or service subscriptions, equipment, etc.
Afterward, the exact purchasing price should be declared. The exact amount should be written in words and figures. Following should be a definition of how the buyer plans to acquire funding.
There are generally three options;
- All-cash offer – All cash offer is meant for buyers paying independent of third-party financiers.
- Bank financing – Bank financing is meant for buyers obtaining funds from financial institutions such as banks. Under this category, the buyer is obligated to provide proof of qualification or approval for a loan. This must be stated in the commercial real estate purchase agreement together with the due date for submitting these requirements.
- Seller financing – Seller financing is meant for buyers who are buying the property through credit given by the seller. It should be clearly stated how much is to be paid as a down payment, the amount that is to be paid through installments, applicable interest rate, the length of the payment period, and necessary documentation must be attached. Information provided should be as specific as possible.
Earnest money deposit
The next item to be addressed in the commercial real estate purchase agreement is the earnest money deposit. The exact amount should be declared as well as the due date. The date should be specific to date, month, year, and time. If an escrow agent is being used to hold the money, it should be identified in this section. It should also be declared if the earnest deposit will be refunded.
The agreement should then state the date and time when the buyer is expected to have decided to proceed or terminate the agreement after inspecting the property. The date should indicate the day, month, and year.
The next step is to include the seller’s disclosure. Under this category, the seller should declare and list any documentation and records related to the property within his or her possession. Such documentation includes title commitment, written notices, copies of leases, water rights, etc.
Type of deed
Next, indicate the type of deed used to transfer ownership of the property to the buyer; that is, it could be a general or special warranty. It should also be declared what type of insurance is expected to be paid for the property and who will be responsible for the insurance expenses between the buyer and the seller. Finally, it should also be specified how many days the buyer has to decide if they will terminate the contract if the obligations emanating from the title commitment are not agreeable.
The next section in the commercial real estate purchase agreement should address survey concerns and declare if the seller-provided surveys are satisfactory or new surveys are necessary. Where new surveys are necessary, it should be clear who is to cover the expenses.
Next, the agreement should clarify how many days a non-complying party has to take for corrective measures, after being issued a notice of non-compliance.
Next, the commercial real estate purchase agreement should indicate the exact date when the transaction will be closed. It should be specific by giving the date, month, year, and time of closing. Certain expenses might arise during closing; declare who is responsible for these costs, or they shall be shared among the parties.
Sale of buyer’s property
If a buyer plans to sell another property before buying the property at hand, it should be declared a sale contingency. The buyer’s property to be sold should be identified by location and the number of days allocated to the buyer to make this sale happen.
A commercial property purchase agreement can sometimes be inclusive of the transfer of certain business rights. If such is the case, it should be stated and the number of days the buyer has to submit the assignability agreement before closing should also be stated.
It is sometimes inevitable to have notices issued by either party during the commercial real estate purchase agreement. Therefore, both parties should outline how they wish to receive notice; it could be either through email, certified mail (with return receipt), personal delivery, or any other.
On some occasions, sellers might opt to include an “as-is” disclaimer in the commercial real estate purchase agreement if they intend not to make representations as to the condition of the property. It should appear at this point in the agreement. An “as-is” should not be interpreted as an opportunity to misrepresent aspects of the property.
The next step in writing the commercial real estate purchase agreement is to list all legally required disclosures that must be submitted before closing. Common disclosures include lead-paint disclosure, well disclosures, termite damage, subsurface sewage disposal system disclosure, etc.
Next, indicate the state whose jurisdiction governs the creation of the Commercial Real Estate Purchase agreement. This is done by simply providing the name of the state where the property is located.
The purchase agreement represents specific terms about the transaction agreeable to both parties when writing the agreement. These terms are subject to change with time, thus needing an expiration date to the offer made through the agreement. The exact expiration date and time of the offer to expire should be clearly stated at this point in the commercial real estate purchase agreement.
Additional terms and conditions
If the parties have additional terms and conditions, they should outline them next. Additional terms and conditions can be given as an attached document with the commercial real estate purchase agreement.
The final-up step in the writing process is to have the signatories of the document provide their signatures. Signatories are commonly the seller, buyer, and any other agent involved in preparing and implementing the commercial real estate purchase agreement, for example, attorney. Each signatory should give their name, signature, and date of signing. Once the document has been signed, it bounds the parties to the commercial transaction.
Note: The Commercial Real Estate Purchase agreement should be worded so that statements are interpreted to mean the same thing. The consequences of crafting a contract, that can reasonably be translated to have divergent meanings, are; litigation, delayed closing, and voiding of the contract as the extreme outcome, all of which can be costly. Involving commercial real estate lawyers can help to avoid this.
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Do’s and Don’ts
There is generally a wide range of things one must do when buying commercial real estate through a commercial real estate purchase agreement. However, to have a successful transaction, there are things one should consider doing or not doing so to say.
- Describe property properly
Property disputes such as boundary disputes can quickly get out of hand, and therefore the property being conveyed must be precisely described to avoid such. The description should be based on recent data and surveys.
- Don’t tie up the property for an extensive period without the earnest money deposit “going hard” or becoming non-refundable
The seller should aim to close the deal in a reasonable amount of time to ensure they get value for their property – remember, property, especially land, is often bound to increase in value with time. Awarding a 1–2-year due diligence period might be hurtful to the seller. The use of timelines every time a milestone is achieved, say six months or less, can be an effective way to execute a sale.
- Allow enough time for due diligence
Inspections and investigations for due diligence require ample to have a detailed report at the end. Therefore, despite the need and urgency to rush property sale deals, enough time should be allocated to ensure due diligence is adequately followed and to reduce issues arising post-closing, which will ordinarily result in litigation.
- Don’t agree to ridiculous warranties, guarantees, and representations
Sellers should avoid guaranteeing, warrantying, or representing aspects of the property that they cannot verify. One should make representation “to the best of their knowledge.”
- Consider the condition of the property
Buyers should carefully consider the condition of the property before agreeing to the asking price. They should take into account renovations or modifications that might be necessary after purchase when negotiating.
- Don’t skip having a lawyer review the commercial real estate purchase agreement
Most people tend to avoid utilizing lawyers due to expenses associated with hiring their expertise and the time taken for review. However, it is important to hire lawyers to clarify any ambiguities to avoid any surprises in the future.
- Understand the transfer taxes, local taxes, and fees in the jurisdiction
Applicable property taxes should be carefully considered to make up part of the expenses associated with maintaining the property. Since each state has different property taxes and fees, it is imperative to familiarize oneself with these guidelines before agreeing to commit to the agreement.
- Don’t get stuck with unknown fees if there is a termination
Just like there is earnest money to compensate the seller when the buyer breaches the contract, a max dollar account should be set up to compensate the buyer should the seller breach the contract. Compensation can be for actual costs incurred in pursuit of the transaction or for specific expenses such as ALTA survey, property inspection costs, attorney fees, zoning reports, etc.
- Get estoppel certificates from the tenants
Estoppel is a legal principle meant to protect tenants from being unjustly wronged due to the sale at hand. Estoppel certificates are necessary to prove the seller has fulfilled their contractual obligations as per the initial lease contract before ownership of the property is transferred. Tenants will often charge at least $500 for estoppel certificates and have up to 21 days to submit them. The commercial real estate purchase agreement should address these two factors so as not to delay closing.
- Don’t close until you are ready
It is common for the closing date to arrive without having all conditions met by either party due to “minor” concerns, delays in construction or landscaping, and such. Closing the transaction without addressing these concerns denies one the opportunity to get assistance from the other party. It is thus important to ensure these issues are resolved before closing and why it is best to avoid closing before resolving any foreseeable concerns. Alternatively, the buyer can place money in an escrow to cover specific concerns.
Frequently Asked Questions (FAQs)
A commercial real estate attorney is generally expected to prepare a commercial real estate purchase agreement once the buyer and the seller have agreed on the terms and conditions of the transaction.
Earnest money deposit is commonly 1-2% of the purchase price depending on the seller, market, and negotiations made. In some cases, it has been observed to be between 5-10%.
A commercial real estate purchase agreement can be closed on any date after due diligence as long as the two parties agree on it. This means this duration varies from one transaction to the other.
1031 exchange is principally a section of the Internal Revenue Code (IRC) that permits real estate property owners to sell property and purchase “like-kind” or, by definition, similar property after closing without having to pay tax.