Purchase and sale agreement definition is a type of legal contract that creates an obligation for the purchaser to buy a product or a service and for the seller to sell the agreed-upon product or service. The agreement is sometimes referred to as a sales and purchase agreement, or SPA, or separately as a sales contract or purchase contract. The P&S agreement acts as a framework of a sale and provides a detailed outline of the transaction that is planned to take place.

What Is Purchase and Sale Agreement Definition?

Typically, the P&S agreement is prepared by the attorneys who are representing the seller and the buyer in a transaction. Some of the details the attorney might include are how the transaction will move forward, what the transaction will include, and any exclusions from the transaction.

Why Is a Purchase and Sales Agreement Necessary?

  • It allows for negotiation between the buyer and seller.
  • It helps the buyer and seller agree on and document a fair price.
  • It dictates the terms of the sale.
  • It contains important information about both the buyer and the seller.

When Is a Sales and Purchase Agreement Used?

A P&S agreement is not required for all transactions and is typically used for a single large purchase. In some cases, it's used for a set of frequent purchases across a set amount of time. The most common use of the P&S agreement is for the sale and purchase of a real estate property. However, this type of agreement might also by used for businesses when purchasing large amounts of material from a supplier or when the business purchases another business. The agreement might also be used when purchasing other types of assets.

Elements of a Sales and Purchase Agreement

Not only do P&S agreements dictate the terms of the sale, but they also contain detailed information about the buyer and the seller and important information that both the buyer and seller should be aware of. This key information might include:

  • Legal name and address of the buyer.
  • Legal name and address of the seller.
  • Definitions for terms that are used within the document.
  • The purchase price of the asset.
  • Type of payment, such as cash, financing, shares, etc.
  • Adjustments to the original purchase price.
  • Payment terms, deadlines, and/or milestones.
  • Any long- or short-term liabilities taken by the buyer.
  • Warranties and warranty details.
  • Rights of both parties after the closing.
  • Arbitration protocol.
  • Dispute resolution.
  • Closing date for the sale.
  • Purchaser's deposit amount and where it will be held.
  • The amount of the mortgage the buyer needs to finance to purchase the house

The P&S agreement might also include supporting documentation or schedules. Some of the schedules might include financial statements, lists of included and/or excluded assets, capital summary, pending litigation, intellectual property, licenses, property descriptions, or a list of bank accounts.

Supporting documentation of the P&S agreement might consist of employment agreements, agreements for noncompetition, property leases, escrow agreements, vendor takebacks, shareholder agreements, or stock option plans.

What Buyers and Sellers Should Know About the Purchase and Sales Agreement

The agreement is signed off after all contingencies, other than financial requirements, have been met. For example, if the requirement for a home inspection has been written into the agreement, the inspection must be complete before it is signed. Once the P&S is signed, it binds both the seller and the buyer to the sale.

Buyers should know that a deposit is typically required at the signing of the P&S agreement and the money is often nonrefundable. Buyers should be cautious when submitting a deposit and signing the P&S agreement and be certain they intend to move forward with the deal.

Other than in a few circumstances, if the buyer walks away from the sale, his or her deposit will be given to the seller. One of the few situations that's an exception to this rule is if a buyer is not able to secure financing for a mortgage. If all other conditions have been met, the deposit might be returned to the buyer in this case.

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