Welcome to “Ed Talks,” a new video series by Offit Kurman business and real estate attorney Ed Bloom. In these short, 5–10 minute segments, Ed dissects real estate-related legal topics to offer practical, easy-to-grasp advice for tenants, landlords, developers, business owners, and anyone else who may be involved in a real estate transaction. With over 30 years of experience handling real estate and corporate transactions, Ed has a broad range of legal knowledge that comprises litigation, negotiations, workouts, lending, leasing, and licensing. As a business attorney, he frequently represents clients on mergers and acquisitions, as well as corporate structure, software licensing, expansions, and succession.
I’m going to be talking with you about the purchase agreement for the acquisition of commercial real estate. The purchase agreement sets forth the pertinent terms and conditions to acquire real property. It should specify all important terms and conditions, allow for maximum flexibility to the purchaser, and minimize any surprises. Try to get the right purchaser to draft the contract to protect the purchaser.
1. Product description
Clearly describe what you’re purchasing. If it’s rural land, specify the square footage. If it’s vacant, say so. If it’s approved land, say so. Use addresses, tax ID numbers, legal descriptions. Attach a depiction of the property if possible. Remember, a picture is worth a thousand words.
Price- especially as far as the seller is concerned.Set forth the exact price. If it’s vacant land, use dollars per square foot. So, if the square footage is adjusted, the price is adjusted. Also consider seller finance.
Most contracts will include a deposit. As the purchaser goes, try to minimize the amount of the deposit that’s posted. Possibly a way to do that is a smaller amount is posted when the contract is signed, increased upon removal of contingencies such as the feasibility period.
4. Feasibility period
That is probably, outside of price, the most important element in a purchase contract. A purchaser should have the full right to inspect the property to its satisfaction. The only restrictions that I like to see in a purchase agreement is subject to existing rights of tenants and possible indemnification for property damage, who’d like to perform environmental studies, physical examinations, and engineering inspections. Try to obtain from the seller copies of title, surveys, full copies of all the executed leases, environmental studies, and, if possible, an appraisal. At the end of feasibility period, the purchaser should have a right to walk away and obtain a prompt refund for any reason or no reason at all. Purchaser needs to be satisfied with the property.
5. Representations and Warranties
Every contract has them. The seller owns the property. The purchaser is buying it. It’s really dependent on those reps and warranties to give it the comfortable level in what it is buying. At a minimum, the seller should represent title; a title is good of record, marketable, insurable at standard rates. Also include sellers of good standing; if property has access from the public right-of-way, there’s no pending litigation, there’s no seller bankruptcy either with its entities or the individuals that own those entities, no pending condemnation. Attach full copies of all the leases and their no known defaults, amendments that are not attached, no known environmental hazards with the property, and no known property defects if possible.
6. Tenant Estoppels
At the time of closing, there should be an obligation of tenants to provide tenant estoppel, you should get that from all or at least the major tenants at the property. Those estoppels should provide that the lease is attached with the full copies, there are no amendments, there are no defaults, and there is no prepayment of rent.
That is when it all comes together. Specify the closing date. If there is no mechanism in the contract to determine the final closing date, you may not have an enforceable contract. Otherwise, you may have all heard the term the rule against perpetuities. Purchasers should be able to select the exact date of closing in a range, as well as the agent conducting the closing. Title to property to be transferred most commonly by special warranty deed concerning jurisdictions such as Virginia, which would text the purchaser the most, a general warranty deed with English covenants of title.
8. Additional Costs
In connection with closing, there are lots of costs involved. Who pays those costs? Most contracts evenly split transfer and recordation taxes. In areas like Maryland, it can be 2.5%. In DC, almost 3% on the purchase price. That’s a lot of money. Make sure that’s negotiated upfront. If you’re transferring rural land in Maryland, then maybe an agricultural tax, which is high, could be paid for by seller. Also, seller should obtain a residency affidavit.
The reps and warranties that I discussed earlier that are being provided by seller, you want to have teeth to them, if they need to survive the closing; if they do not survive the closing, they’re merged with the deed. 18 to 24 months should be the minimum to protect the purchaser.
10. Post closing obligation
If there are any post closing obligations, they should be detailed in writing and signed at the closing table. Some post closing obligations, possibly allocations of rents collected post closing, who pays special tax assessments, seller should be obligated to provide notices of the sale to an existing tenant, and so it should also be obligated to promptly deliver purchaser any notices received after closing. Good luck with your property search. Thank you. Have a question about anything I have written here, or need guidance for a real estate transaction? Please feel free to get in touch. To contact me, click here.
ABOUT EDWARD BLOOM
Edward A. Bloom practices real estate and transactional law. His practice is primarily concentrated on real estate development, real estate litigation, real estate workouts, real estate and corporate lending, leasing, licensing, corporate and transactional matters. Mr. Bloom has over 30 years of experience on all types of real estate and corporate matters. He counsels developers, owners and users on acquisitions, dispositions, financing and development projects. He has extensive experience on all types of lease matters. He regularly represents tenants in the negotiation of leases from 5,000 to 100,000 square feet in size. Mr. Bloom has drafted and negotiated numerous work agreements for tenant build-out in connection with leasing matters. He has represented lenders, borrowers and asset portfolio purchasers on loan workouts, restructurings and foreclosures.