Commercial Real Estate Contract Provisions
Commercial real estate contract provisions consist of terms outlined in a contract which might include warranties, representations and closing conditions.3 min read
Commercial real estate contract provisions consist of terms outlined in a contract. These terms might include warranties, representations, closing conditions, and covenants. After receiving the first draft of the contract, the seller can look over each provision suggested by the buyer and negotiate necessary changes.
What Happens During a Commercial Real Estate Transaction?
When two parties agree upon the terms of a commercial property sale, the buyer prepares the first draft of a contract and allows the buyer to review it. The contract embodies a variety of terms and customary provisions which vary depending on the contract. Once the contract is laid out, the seller and their attorney or representative can focus on the contractual language and concepts they would like modified or removed.
Common Contract Provisions
While it's easy to spot provisions that you want removed or modified, it's more difficult to identify provisions that are missing from the draft. Here are a few provisions a seller should have in the contract that the buyer may tactically omit:
- Not binding until executed
- Negotiations usually begin with a letter of intent, which states that there is no formal agreement until the final contract is signed.
- Limitation on the survival of warranties and representations
- Most contract drafts require sellers to make specific warranties and representation, and all parties must negotiate the survival timeframe for those warranties and representations.
- Definition of “knowledge”
- Some contractual language includes the phrase, “to the best of the party's knowledge,” which is why defining this word is crucial.
- The seller, in particular, should consider what “knowledge” means when making warranties or representations.
- Integration or “as-is” sale clause
- In certain circumstance, a property seller may want to include a detailed statement that the sale is strictly “as is,” without any warranties or representations of any kind.
- With as-is clauses, the seller assumes the risk and must make the decision in due diligence.
- Due diligence-related provisions
- Most contract drafts will provide the buyer with a certain amount of time to enter, inspect, and test the property.
- The seller will want to indemnify themselves against any property damage or injury that occurs during the buyer's entries.
- Broker indemnity
- Many contracts include a provision stating that neither party has used a broker.
- Since some states require the seller to pay a broker's commission, even without a written agreement with the broker, it's important to add this clause.
- Limitations on buyer remedies
- In the event of a seller's default, the buyer may want to include a provision stating that remedies are available to them either in equity or at law.
- Time is of the essence
- A “time is of the essence” provision concerns the buyer more than the seller, so it's often missing from the buyer's contract draft.
- This provision outlines definitive drop dates should the buyer choose not to close on the property, at which point the seller can remarket it.
- Buyer's representations
- The average buyer's draft doesn't include any buyer's warranties or representations, but the seller would be smart to include some basic ones regarding the buyer's authority and status.
- Buyer's assets
- During the initial negotiations, the seller typically deals with individuals affiliated with the buyer.
- In some cases, the buyer may be a single-purpose entity that is undercapitalized, and the seller would be wise to avoid a deal in favor of negotiating with a buyer with ongoing viability and assets.
- “Whereas” clause
- Sale contracts often begin with “whereas” clauses or “recitals.”
- “Whereas” means “given the fact that,” and serves as an introduction to the sale, but recitals are not technically a part of the contract's provisions.
- Transfer documents
- A transfer documents clause relates to assignments, deeds, and bills of sale, each of which are transferred by different means.
- Purchase price, earnest deposit, and adjustments
- A property's purchase price is a set amount, but that amount is subject to adjustments at closing.
- The contract will also state who holds the earnest deposit and what happens to that money if the deal doesn't close.
- Buyer's contingencies
- Since a buyer doesn't know everything about the property, they are given a certain timeframe to review the property to determine if everything is satisfactory.
- Contingencies differ depending on the contract but may include land-use approvals, lease reviews, title reviews, property surveys, building/property inspections, and environmental condition assessments.
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