All commercial real estate transactions involve a lot of paperwork, and investors need to have a good knowledge of what these documents are and their functions. One of such documents is the purchase and sale agreement (PSA). What is a PSA in commercial real estate?
What Is a PSA In Commercial Real Estate?
A purchase and sale agreement (PSA) is the most important document in any commercial real estate transaction. It is a legally-binding document that specifies the terms of the transaction, as well as requirements to be met by both parties. The process of drafting a PSA involves a series of negotiations and revisions before a final document is accepted.
A PSA is usually drafted up after a letter of intent (LOI) has been signed and both seller and buyer have agreed on the basic terms of the sale such as price. In some cases, however, both parties might choose to waive an LOI and proceed straight to negotiating the terms of the PSA.
Basic Aspects of a Purchase and Sales Agreement in Commercial Real Estate
The recitals usually come right after the effective date of the agreement, and the parties involved -the seller, buyer, and escrow agent- have been identified. Recitals usually begin with the word “whereas” and serve as an introduction of sorts. However, they are generally not considered to be part of the contract’s operative sections.
Sales of Property
This section includes a description of the property to be sold, usually of three types -real, personal, and other. Real property includes the land and improvements. Personal properties include structures and facilities on the land. Other properties include rights, licenses, warranties, etc.
Also included in this section is a purchase and sale statement, the purchase price, and the deposit and escrow details.
Title and Survey
This section covers all the requirements that surround the buyer obtaining a title report as well as a survey of the property. The contract also states what party finances the survey, how long the buyer has to submit an objection notice, and how long the seller has to cure them.
Finally, provisions will be made for the buyer to terminate the transaction if the objections made are not cured by the seller in due time.
Inspections and Due Diligence
Here, the right of the buyer to carry out inspections and the rules to be followed during these inspections will be stated. It also covers the consequences the buyer would face if any of the rules are broken. The duration of the due diligence period is also stated, alongside other provisions regarding various forms of due diligence.
Representations, Warranties, and Covenants
Representations and warranties are statements that serve to declare the truthfulness of facts laid down by both parties about themselves and about the property to be sold or bought. Examples of some common representations and warranties are:
- That seller/buyer has the legal authority to sign the contract
- There are no violations regarding land use
- The documents provided to the seller by the buyer are correct
The requirements for warranties might also vary from state to state. For instance, in Ohio all sellers from all counties, including the Cincinnati area, are mandated by the law to fully disclose all building defects that they are aware of before the closing date. Northern Kentucky has the same requirements. This might not be the case in some other states.
Important details about the closing such as where and when it will take place, and by whom it shall be supervised -usually the escrow agent are also covered. In most cases, closing dates are not flexible, and the buyer has the right to end the contract if the closing does not hold as planned.
Documents to be provided at the closing include:
- Transfer deed
- Assignment and assumption of leases
- Bill of sale
- Original of the leases
Terminations and Default
The contract also discusses other actions. These include actions from both parties that could result in a default, whether or not it is possible to waive the default and move on to closing, and what happens after the termination of the contract by either buyer or seller, as regarding buyer’s deposit and damages.
Benefits of a PSA in Commercial Real Estate
In commercial real estate investments, the PSA is an essential document that plays a critical role as the transaction progresses. Among several other benefits, it provides a framework for the transaction and ensures that both players are on the same page regarding the terms of the sale. Here are some of the benefits of having a PSA in commercial real estate transactions:
A PSA can help to mitigate risks associated with commercial real estate transactions. Commercial real estate deals are complex and involve significant amounts of money, so a well-drafted PSA can protect both the buyer and seller even after both parties agree by clearly outlining the terms and conditions of the sale.
The PSA ensures that both parties have a shared understanding of the transaction and can manage potential risks accordingly.
Clarity and Certainty
A PSA provides clarity and certainty to both the buyer and the seller. The agreement outlines vital details such as the price, closing date, contingencies, and other essential transaction terms. This reduces the risk of misunderstandings, confusion, and disputes and ensures that both players clearly understand what is expected of them.
Avoiding Legal Disputes
A PSA can help prevent legal disputes during or after the transaction. The agreement outlines the terms and conditions of the sale so both buyer and seller know what they agree to. This helps reduce the risk of legal disputes, which can be costly and time-consuming.
Protection of Investment
A PSA can protect the investment and prevent the wastage of seller time. For the buyer, the PSA can include contingencies that allow them to back out of the agreement n if they discover any issues during the due diligence process.
For the seller, after the buyer accepts, the PSA can include provisions ensuring they receive the sum they expect. Investment protection is critical in commercial real estate, where deals often involve significant financial investments in property.
A PSA can be customized to meet the specific needs of the buyer and seller involved in the transaction. The stakeholders can negotiate the terms and conditions of the entire agreement to ensure that it meets their specific requirements. This allows for flexibility and facilitates a smooth transaction.
Difference Between a PSA and an LOI
A PSA (Purchase and Sale Agreement) and an LOI (Letter of Intent) are both essential documents in commercial real estate transactions. Still, they serve different purposes and have different levels of legal significance. Here are some of the key differences between a PSA and an LOI:
A PSA is a legally binding contract that outlines the terms and conditions of the property sale. At the same time, an LOI is non-binding and is only a preliminary expression of the buyer and seller’s intentions to enter into a formal agreement.
In other words, an LOI is a way for the buyer and seller to start negotiations and establish a framework for a potential deal on the property, while a PSA is the actual contract that solidifies the deal.
A PSA is a detailed document that covers all of the specific terms and conditions of the property sale, while an LOI is generally less detailed and provides a more general outline of the proposed transaction.
While the LOI might set out basic terms such as the amount and closing date, the PSA will include much more specific details such as contingencies, warranties, indemnifications, and other legal clauses that protect the buyer and seller of the property.
An LOI is often used as a starting point for negotiations, whereas a PSA is usually the result of those negotiations. The seller and buyer can use the LOI to discuss and agree upon the general terms of the property transaction and then use that as a basis for more detailed negotiations leading to the PSA.
A PSA is a legally binding contract. This means it carries much greater legal significance than an LOI. Failing to comply with the terms of a PSA can result in legal consequences, including the possibility of financial damages or the inability to complete the sale of the property.
What Kind of Professional Help Is Needed to Draft a PSA?
To draft a purchase and sale agreement, both parties have to hire the help of legal practitioners with experience working on commercial real estate transactions. Also, you could hire the services of a commercial real estate company, such as Si Vales Valeo Real Estate to oversee the transaction from start to finish to ensure that everything goes smoothly.
Does Signing a PSA Mean the Transaction Is Completed?
No, by signing the PSA, both parties do not automatically agree to buy/sell the property.
A purchase and sale agreement is not an agreement to sell or buy a property, but instead, a framework containing the negotiation process and agreed terms that lead up to the completion of the transaction.
While preparing to invest in a commercial property, you should also make adequate preparations for the back and forth negotiations that come with drafting a PSA. We believe that the information above will give you an edge as you negotiate, but to ensure a seamless transaction, you should contract the services of a real estate lawyer and a commercial real estate agent.