Definition of a Commercial Purchase Contract
The commercial purchase contract is a document that facilitates the purchase and sale of a business (including the land, equipment , intangibles and inventory). The contract will state what is being purchased and what is excluded. The Terms and Conditions and the Reps and Warranties in the contract are critical. They provide conditions for purchasing the business and in some instances hold the seller liable for future problems (for up to three years). You should review the Terms and Conditions and Reps and Warranties carefully before signing. A lawyer with experience in these types of contracts is your best approach.
Key Components of Commercial Purchase Contracts
While the requirements for commercial contracts vary from state to state, standard elements are typically required to ensure that a commercial purchase contract serves as a legally binding document. Among the most common elements found in commercial purchase agreements are the following:
Parties Involved – The contract needs to list all parties to the transaction involved in the sale. These may include the seller, the buyer, and possibly other entities or individuals involved in the sale.
Terms and Conditions – All purchase terms should be stated clearly, including the sale price and any contingencies that must be met prior to closing. For example, the completion of an inspection or obtaining financing may be contingent to closing.
Payment Details – Payment terms quickly become one of the most contested areas of a real estate contract. All financial conditions should be clearly spelled out in the contract including down payment amount, financing details and the type of payments to be made (mortgage payments, lump sum, etc.).
Warranties and Representations – Recognized legal protections for both parties, as well as remedies for breach of contract and other contingencies for failure to close, should also be included.
Negotiating Commercial Purchase Agreements
The negotiation process for commercial purchase contracts is essential to ensuring that both parties’ interests and intentions are appropriately memorialized in the contract. In a very literal sense, these provisions will determine the future of the parties’ relationship with the Seller and/or Purchaser. For this reason, special care should be taken in drafting and negotiating even the most basic of terms and conditions.
When approaching negotiation of a commercial purchase contract, one of the cardinal rules to keep in mind is that no change is too small not to make it into the contract. Even the most seemingly innocuous provisions of your purchase contract can lead to complications if left unaddressed before closing. Another good rule of thumb for contract negotiation is to establish priorities early in the negotiation process. These priorities can come in the form of a ranked list of terms, each of which is listed in order of importance to the overall deal. If you and your business partners are not in agreement about which terms are most important to the deal, you risk finding yourselves poorly equipped for the issues that may arise during negotiations.
Some of the most important enclosed terms to look out for when negotiating a commercial purchase contract include the following:
Despite your best efforts to properly negotiate the terms of your purchase contract, there is still a strong chance you may encounter an issue or complication before the deal can be executed. Should this occur in your case, you may be able to revise the contract in order to accommodate the new information or evaluation of the deal. In addition, an attorney experienced in commercial real estate transactions can work to ensure the deal closes and all terms are satisfied to both parties’ satisfaction.
Commercial Purchase Contract Legal Issues
Even when done right, commercial purchase contracts can create a series of potential legal issues. Whether both parties are private businesses or the private sector and a local or state government entity, disputes can arise over contract interpretation and obligations. From breaches of contract to misunderstanding legal jargon to late or missed deliveries, buyer and sellers of commercial business goods and services can find themselves facing the following legal issues: In one very real example, A-1 Commercial Painting, Inc., filed for a temporary injunction against DEF Industries LLC (DEF) stemming from an alleged breach of contract. A-1 sued DEF for breach of contract and also named the owner as a defendant. The general contractor that had hired both companies wanted to bring them into one breach of contract action. It was determined, however, that both A-1 and DEF did not engage in joint undertakings but were each independent contractors. As such, because they did not enter into one common enterprise but rather they were engaged separately with respect to separate pieces of a project, the court found that DEF could not be brought into the breach of contract lawsuit as a third party as its interests were not aligned with either of the other two parties. However, in many other instances disputes between both private and public agencies brought contract disputes into the court system for resolution. Specifically, in Tri-Cities Newspapers, Inc v. Lincoln County, 936 P.2d 53, the plaintiff, Tribune had a contract to provide subscription services to Lincoln County. When Tribune learned that Lincoln County was not offering subscriptions to the public it sought to enforce its contract through the court in order to protect its business venture. In this instance, the court found that Tribune was entitled to the enforcement of its contract with Lincoln County. It is not entirely uncommon for commercial purchase contract disputes to go all the way to the appellate courts for resolution, as indicated by the above cases. Even though small business entities may not have the financial resources that large corporations have to fight legal battles, it is critical for buyers and sellers of commercial goods and services to understand what goes into a legally binding and enforceable contract. Because commercial purchase contracts are so important in establishing the rights and obligations for businesses, and may be legally binding, it is crucial that both parties have representation to review, redraft, and finalize one that is acceptable to both parties.
Commercial Purchase Contracts and the Drafting Process
When it comes to drafting a clear and enforceable commercial purchase contract, best practices revolve around ensuring the contract is written in plain language that is easy to understand for all parties involved. The contract should also encompass the complete agreement and contain no ambiguities as to the intention of the parties. To this end, it is often advisable to outline all significant details of the transaction in the contract, including purchase price, down payment, contingencies and financing arrangements in order to satisfy the contractual requirements of the Agreement of Purchase and Sale (APS).
Developing a clear and comprehensive commercial purchase contract requires an understanding of the business objectives of the parties involved. Adequate time should be allotted for the negotiation of essential elements of the agreement, and enough care should be taken to properly advise your client on the commercial implications of the deal . It is equally important to have the Contract reviewed by legal counsel to ensure that it complies with real estate law and common law principles.
If the area of real estate law applicable to the sale of the property in question is determined by the Province in which it is located, then the Contract must comply with that Province’s legislative requirements. Consequently, a seller seeking to sell his or her property in Ontario will find that the APS has been established by the Real Estate and Business Brokers Act (REBBA), which sets out the minimum requirements of a purchase and sale agreement in order for the transaction to be valid. For instance, the APS obligates a buyer to remove all contingencies, such as the completion of a mortgage or satisfactory answer to inquiries made by the buyer by a specific date, and failure to comply with such a requirement will entitle the seller to either terminate the contract or sue the buyer for specific performance.
A Buyer should therefore never sign an APS in anticipation of removing contingencies without seeking the advice of legal counsel.
Role of Legal Counsel in Commercial Purchase Contracts
The meticulous drafting and review of commercial purchase contracts call for the assistance of a lawyer knowledgeable in this highly specialized field of law. Purchasers and sellers alike should seek the advice of experienced counsel at the earliest possible opportunity prior to the finalization of a purchase. From the standard contract preparation by way of an offer to the due diligence process leading to the execution of the agreement of purchase and sale and the closing of the transaction, knowledge of the law and experience in dealing with complex sales are invaluable at all stages of the process.
Most noteworthy of the benefits to both the seller and purchaser of commercial real estate in hiring a lawyer is that they can ensure that the parties fully comprehend all the potential risks that are associated with a purchase and sale of commercial property before entering upon an agreement. This allows for the establishment of a strong base for further negotiation, not often found in a commercial real estate transaction. Likewise, the protection of the parties from issues and concerns only a trained eye would notice is best accomplished through competent legal representation.
Solidifying Successful Transactions
Commercial purchase contracts are much more than just legal formalities; they are the building blocks of successful business transactions. By clearly articulating the key terms of sale, such as the purchase price, applicable transaction schedules, financing details, and contingencies, these agreements help not only to facilitate a smooth transfer of business ownership , but also to minimize the risk of legal disputes between buyers and sellers after closing. What is particularly important to recognize is that even routine business transactions require attention to detail and thoroughness in contract preparation. Your lawyer must ensure that the terms of your commercial purchase contract accurately reflect the deal you are making with the seller or buyer, and address all relevant matters of concern to you so that you are not left exposed to costly risks down the road. The advice of an experienced Toronto business lawyer is essential to ensuring that your company is protected through all stages of negotiations, closing, and shortly after your commercial purchase agreement has been signed.