One of the most important documents when purchasing commercial real estate is a purchase and sale agreement (PSA). The buyer’s attorney draws up this document, which contains all the information about the buying and selling of the property. Reaching an agreement on the conditions of the PSA can be challenging, and it’s vital to know how to negotiate a strong purchase and sale agreement.
To negotiate a strong PSA in a commercial real estate deal, you need to be represented by an excellent attorney, make sure you get to know the seller and include as much as you can in the PSA. Include clauses like due diligence, rights to the property, and each party’s obligations during the sale.
It’s always better to be the party that drafts the legal document. This is possibly the most important rule of negotiating a strong PSA. When you are the party that prepares it, you are familiar with the document, what’s included, and all the terms and conditions. The other party needs to read, evaluate, and take time to assess the document.
What Is A PSA In Commercial Real Estate?
The purchase sale agreement is a legal contract that a commercial property owner and buyer enter into. This document outlines the terms in which the seller is to sell the property, and the buyer will purchase it.
It is usually drawn up by the buyer with the guidance of an attorney and then presented to the seller. Negotiations occur between both parties until the purchase and sale agreement conditions are agreed upon. Once a consensus has been reached, the PSA is finalized.
Since this is a legally complex document, it is always drafted by a private equity firm or a legal professional.
There are three main aspects that are covered in the contract:
- A detailed description of the building being sold, the cost, and the type of transaction the buyer will use to make the purchase.
- What is required to make the transaction or the property sale valid?
- The buyer’s and seller’s obligations concerning the property being sold.
Negotiating A Strong PSA In Commercial Real Estate
Negotiating a strong PSA protects both the buyer and the seller and outlines the responsibilities of both parties concerning the sale of the property. While navigating this can be challenging, there are a few things you can do to get an excellent commercial real estate deal.
Here are a few tips to negotiate a strong PSA:
- Get to know the seller. Knowing who you are negotiating with is crucial in getting a good deal. You’ll want to understand who they are, their motivations for selling, their expectations of you, and their track record.
- Include as much as you can in the PSA. The more detailed the contract is, the less likely it is for the buyer or seller to find loopholes. A detailed purchase and sale agreement also covers all aspects of the sale and protects both the buyer and seller.
- Research. Researching the property, the market, and other property variables is vital to negotiating a fair price.
- Incorporate a win-win strategy. When negotiating, think about a win-win strategy. Most people want the best deal without considering the other party and go into the negotiations with terms that only benefit them. But when you offer something that benefits both sides, the party you are negotiating with is more likely to agree to the clauses in the contract.
- Find an excellent attorney. If you pick an excellent attorney from a reputable company, they’ll know the ins and outs of the PSA and how to help you negotiate the best deal. They also help navigate the process and comply with legal and regulatory requirements. A great attorney can also assist in identifying any issues within the agreement and propose solutions.
What Is Covered In The PSA?
There is a lot of information covered in the purchase-sale agreement, and each contract is unique. However, you’ll find a few clauses in most PSA documents. These include:
Purchase Price And Terms And Conditions
The purchase price section stipulates the cost of the property and the security deposit. It also covers the buyer’s commitment to purchase and the necessary fees involved before the purchase is complete. The terms and conditions also cover how the balance (the total property price) will be paid. It also includes the method of payment and closing costs.
Description Of The Property
The property description includes the address, type of property, location, size, and legal description. This section may also include information like whether the building is furnished or unfurnished if it has a courtyard or garden, and any other relevant information relating to the property.
Warranties And Obligations
The warranties and obligations section includes the seller’s ownership and the buyer’s financial ability to make the purchase. It also includes the legal status of the property, liabilities, and clauses covering contract breaches.
Due Diligence
Due diligence is included with larger asset sales and covers specific periods in which payments and deposits must be made. It also gives the buyer the right to inspect the property and terminate the purchase and sale agreement should they be unhappy with certain aspects of the property.
This clause is often broken into categories like environmental factors, zoning compliance, leases, and service contracts.
Damages
A section for damages is included in the agreement and covers any damages that may occur while the sale is still in its transaction phase. This may cover major and minor damages and ways to remedy them.
Additional Sections
Commercial real estate PSAs can contain additional sections like broker commissions, surveys, tenant contracts, and the property’s current condition. Some purchase sales agreements are lengthy and include many clauses, while others can be simple and just a few pages long.
Conclusion
Purchase and sale agreements are complex legal documents that are essential in the sale of commercial property. Knowing the seller, researching the market, and adapting a win-win strategy are elements you can use when negotiating a strong PSA deal.