The Fine Print
Look beyond big issues to get to a smooth closing.
Real estate sales agreements are packed with fine print, and often the lawyers are the only people reading it. While lawyers are paid to lock down all the details of legal agreements, buyers and sellers should always ask questions. Never take anything for granted, and remember that the purchase and sale agreement sets the rules for the rest of the game.
Don't let your determination to get an agreement signed cause you to look past big issues that could spell trouble on the backside of a deal. Beware of these key sales agreement risks for sellers.
Representations and Warranties
Buyers frequently ask sellers to warranty the history of a property. No buyer wants to discover that a site that seemed perfect for luxury apartments is a brownfield that will need decontamination. A seller may have no knowledge of any environmental problems, but fears being blindsided by revelations.
From a seller's standpoint, such representations expand the seller's liability in the future and may discourage the buyer from completing full due diligence. If you must agree to representations and warranties, stand firm on capping the limits of your liability to 3 to 5 percent of the purchase price in most deals. To avoid nuisance claims, set a floor for claims of $10,000 to $25,000, depending on the purchase price.
Set Realistic Timing
Time frames must align, such as the expiration of the due diligence period, time to make title objections, and time to close. For example, a contract may say the purchaser has 10 days to make title objections or give the seller five days to respond to any objections to the title. Every real estate deal is urgent, and applying pressure to get it done is part of the negotiating process. Be realistic and don't agree to time frames without assessing if they align with your priorities and are consistent. Allow appropriate time for due diligence.
Beware of Rights to Assign
If the contract doesn't limit a party's right to assign, the default rule is that either party may assign freely. A seller may not want to allow a purchaser to assign to any entity, since the seller wants to receive full consideration for the property by avoiding flip deals and because the seller wants to know the buyer. Limitations on the right to assign typically are buried in the sales agreement miscellaneous provisions and are overlooked easily.
Follow Up on the Escrow
Ensure that earnest money is placed in escrow. Failure to do so can be the result of an oversight or it can be a risk-avoidance strategy of an unscrupulous buyer. Either way, establish a process for confirming that escrow deadlines are met.
Negotiate Default in Your Favor
A shrewd seller will be cautious of allowing a buyer to seek specific performance in the event of seller default because not all defaults are intentional. For example, a seller could be held in default for failing to deliver marketable title if a lien is filed and the seller was unaware of it. In this case, the seller needs to keep options open for terminating the agreement. If you have the negotiating leverage, include a provision that gives you the right to back out of the contract with the only remedy for the buyer being the return of earnest money. Most buyers will insist on more severe consequences for the seller because the buyer already may have racked up fees for lawyers, accountants, and due diligence inspections. A more realistic and fair remedy that still gives the seller flexibility is one that allows for payment - with a cap - for these buyer expenses. It's always better to build in flexibility to avoid pitfalls that can occur, even when both parties are acting in good faith. A strong default provision increases the seller's negotiating power on other issues.
Think Ahead on Estoppel Letters
Buyers frequently want estoppel letters from tenants to confirm their lease commitments. The estoppel letter doesn't change the terms of a lease, but confirms the existing rent, deposit, and other obligations of both parties. Sales agreements often are contingent on obtaining estoppel agreements from all or most tenants. A few stubborn tenants can complicate a deal, and astute sellers should limit the number of estoppels required to 80 to 90 percent of existing tenants.
Look at the Whole Picture
Brokers are the experts at getting to “yes” in a deal, while lawyers council their clients regarding potential risks - hopefully contemplating all possible outcomes. It's a good combination for clients, and well-drafted sales agreements will provide protections without unreasonable provisions that jeopardize a deal. To have a smooth closing, make sure everyone is aware of the fine print.