By Eli M. Udell Real Estate Lawyer, Merovitz Potechin LLP
A key element of negotiating and finalizing a commercial Agreement of Purchase and Sale is determining necessary conditions and, by extension, a deadline for the waiver or fulfillment of those conditions.
Conditions in an Agreement may be drafted in favour of the Buyer, the Seller, or both parties, and may range from broad strokes, such as due diligence, to narrow issues, such as the repair of a deficiency identified during inspection. Regardless of the conditions included, a deadline is typically established in the Agreement to determine the date on which each party must decide whether to waive conditions or terminate the deal.
As legal counsel to real estate prospectors, investors and owners, I am often asked to highlight issues that must be considered during negotiations and during the conditional period itself. Common threads have emerged, especially in the context of Buyers and Sellers. The following is a list of recommendations from both perspectives.
If you are interested in purchasing commercial property, and you have future plans for the property beyond the existing structure or layout, consider consulting with a licensed planner before submitting an offer. A planner will review the existing property footprint with you, and will also report to you on zoning. This will help you determine if the Agreement will need to be conditional on the pre-approval of plans, on obtaining a building permit, or on confirmation of re-zoning or other planning issues.
After you have decided to submit an offer to purchase, it is helpful to include a general due diligence condition in your favour. Ensure that the condition deadline will give you more than enough time to complete your due diligence, so that a future request for an extension is unlikely. Extension requests degrade leverage. Also, consider scheduling the title search deadline in the Agreement on the same date as the conditions deadline, so that your lawyer may submit his or her title requests while the deal is still conditional, thereby maintaining your leverage.
During the conditional period, consult with trusted experts such as an environmental engineer—it is always more cost-effective to spend a bit more during the conditional period in order to save a bundle after waiver or closing.
Finally, it is critically important for the Agreement to state that if you do not notify the Seller that conditions are waived or fulfilled, the Agreement is terminated. In some cases, an Agreement will state that silence equals acceptance. In that case, if written notice is not delivered, the transaction automatically goes firm. Therefore, it is essential to recognize this risk and to ensure this language is correct in the Agreement.
If you are selling a commercial property and taking it to market, consider retaining a licensed and experienced inspector to pre-check and pre-clear the property before entertaining offers. This will permit you the indulgence of time to repair and/or resolve minor issues (cosmetic or otherwise) before prospective purchasers tour the property, propose a conditional period and, potentially, order an inspection.
When negotiating the terms of the Agreement itself, we recommend that our seller clients limit the number of conditional periods which, by extension, limits confusion and the number of potential extension requests. Even if the Buyer has multiple conditions in his or her favour, such as financing and due diligence (including a building inspection and environmental review), a single deadline for the waiver or fulfillment of conditions is
Finally, when finalizing terms of the Agreement, consult with your legal counsel to ensure that the “representations and warranties” you are making about the property are limited to only those items that are absolutely necessary. If the Buyer has negotiated a conditional period that includes a period for due diligence, he or she should be able to obtain their own level of comfort about the property without extra guarantees and/or warranties from you as the Seller. Ultimately, the objective is to limit the parties’ exposure after closing. To that end, it is important to take a hard look at the terms of the contract during negotiations in order to remove any unnecessary language.
Conditional periods are essential to the strength and survival of commercial Agreements of Purchase and Sale. A measure of trust between the Buyer and the Seller is vital. By extension, negotiating appropriate terms in the Agreement to identify what is important to each party and to limit possible extension requests is extremely important. While these negotiations may take a bit more time and effort than expected, the resulting terms will identify issues that must be considered during the conditional period, and will reduce the number of surprises from conditions to closing.
From: InvestCRE Magazine.