This article outlines specific concerns related to an office commercial real estate purchase and sales agreement. Below, we’ll discuss the clauses in the agreement to adjust from a neutral agreement between buyer and seller. You can download this free office purchase and sale agreement and make necessary changes to benefit you. Specifically, we’ll discuss the types of changes within each clause, general numbers in this market, what other changes to make, and which of those changes affect other parts of the agreement.
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Office Purchase and Sales Agreement Template Walkthrough
Identifying the Parties in an Office Purchase and Sales Agreement
This is a critical part of the contract. Both the seller and the purchaser need to be properly identified to ensure the validity of authority. While most drafting errors in the purchaser and seller entities can be remedied prior to closing, it is possible for a misidentification to limit one party’s recourse.
Identifying the Purchaser Entity in an office PSA
For the purchaser, it’s common to form a shell LLC entity as the purchaser in all real estate deals. This entity then will assign such contract to the Special Purpose Entity (SPE) prior to closing and taking title. The shell SPE protects the purchaser in the event of any purchaser default or other monetary obligations which survive termination of the PSA. As a seller, you want to ensure that individuals or other corporate entities that have assets remain jointly liable beyond just the shell SPE.
Identifying the Seller Entity in an office PSA
Beyond demonstrating a basic level of proficiency in records research, properly identifying the seller establishes credibility for any unsolicited or non-represented offers. It’s critical to name the correct party, especially if you have multiple owners within an office park. Note that it’s not necessary to try and dig into property ownership of the entity, or to try and create a signature block.
Property Description for an Office Purchase and Sales Agreement
Identifying the property description for an office purchase can be complicated for larger buildings with multiple structures. Relying on street addresses, common trade names, or even assessor parcel numbers (APN) or lot numbers won’t necessarily capture the entire land being conveyed. For example, it’s very common for office building owners to purchase adjacent parking parcels. The beginner investor may not realize that such parcels would need to be included in a quick overview. It’s vital to physically observe the property (Google Earth has great tools for this!) and see if adjacent areas are being utilized. You may also see signage indicating shared usage or overflow parking. When pulling records for your seller, you may notice that the legal descriptions do not match what is physically observed at the property.
Personal or Intellectual Property with an Office Purchase
In addition, you must consider what items of personal or intellectual property will convey with an office purchase. We consider office kind of a middle ground: you want the dirt, you want the improvements, the fixtures, everything that’s not excepted via purchase money liens. The intangible personal property, it’s incredibly important that you purchase all of the websites, the marketing collateral, the trade names, the photographs, etc. These items may be more important for an office building than an industrial property, but less important than for a multi-family property.
You should talk to your lawyer about expanding this section to include, passwords, photographs, websites, email addresses, Google business listings, etc. There are a number of items that are important and that maybe a buyer expects, but if it’s not in the contract the seller is not obligated to transfer that over to you.
Representations and Warranties of Seller
With office purchases, there is much more room to negotiate a longer and more robust Seller Representation and Warranties clause in the Purchase and Sale Agreement. The demand is bifurcated into high demand, high occupancy office buildings and older, outdated products with little demand. Most sellers of office products will be willing to provide longer warranties than an industrial or multi-family product.
Length of Representations and Warranties
The length of the seller’s representations and warranties should be long enough for the purchaser to discover or verify statements made by the seller. For example, seller representations about the revenue received for tenant leases or additional storage rental units would be covered under a seller warranty. The purchase needs several months to discover such deficiencies.
We typically draft six to twelve months, but office situations are longer than multi-family and industrial.
Scope of Seller Representations and Warranties
The scope of these seller representations and warranties will also vary depending on the type of office purchased. We focus on financial amounts in total, per claim minimums, and the nature of the claims. There can be limited or no warranty for the quality of types of construction, materials, engineering or design, etc. We tend to see the most claims for financial misrepresentations.
This is really important for office situations, where you may have a large tenant improvements balance that is being recovered and so that should be clearly outlined in the estoppel. This will become a new landlord obligation if it’s on a schedule or you would push the seller to reimburse the tenant prior to closing, so the tenant can now sign the estoppel and you can get it to inherit a good tenant that is at a zero balance.
Condemnation and Casualty Events in an Office Purchase
We do look at these condemnation and casualty clauses because they do arise about one in every hundred transactions. They are important and you should evaluate your own priorities to modify or accept existing language. When we define a material portion, it’s neutral and doesn’t really favor one side or the other. Material is always open to negotiation. A better phrase would be if we put a monetary threshold such as $300,000 because then you can actually obtain estimates and objectively build your position.
Notices in an Office Purchase and Sales Agreement
The notice section will contain the following:
- Name of Party
- Individual Attention
- Mailing Address
- Email Address
The notice clause requires that any legal notices under the contract are sent via overnight courier or other trackable methods. Critical timelines rely on this notice section and this can often be a source of disagreement.
We generally don’t see the email and phone section filled out, and we would suggest that you fill it out as best you can. You can also add a section “with copy to” where we usually add attorney contact information. It is also important to agree if the parties agreed to notice via electronic mail or only want to do a hard copy via overnight courier.
Please remove any references to fax numbers! We would not want an accidental number being populated here and allow one party to attempt to send a fax in 2022! We understand that some government agencies and hospital records still use fax, but it is very uncommon in commercial real estate transactions.
What Exhibits are included in an Office Purchase and Sales Agreement?
The Exhibits to an Office Purchase and Sale Agreement will generally fall under one of two categories: additional descriptive information about the property or sample forms to be executed at closing.
- Legal Description. This is standard to precisely describe the legal property. There are five different methods, we typically use only one. 1) the United States Public Land Survey System (USPLSS), sometimes referred to as the “rectangular” or “quadrangular” survey system; 2) descriptions referring to recorded subdivision plats; 3) the metes and bounds description; 4) the State Plane Coordinate Systems; and 5) general descriptions incorporating extrinsic evidence.
- Survey. We need to agree on the legal description and then ensure that the particular survey matches that legal description. This is typically a previously ordered survey provided by the seller.
- Tenant Notice Letter. This is a letter from the seller indicating that the property has changed ownership. It will provide instructions for the tenants to direct property management inquiries or payment information and the effective day. With multiple tenants, it is important that you have this authority to come from the seller. If I were a tenant and I received a random request from a third party directing me to pay a new bank account, I would reasonably be skeptical. This document is the easiest evidence of your new ownership.
- Subordination, Non-Disturbance, and Attornment Agreement. This imperative document is an example of low probability, but high penalty scenario. The low probability is that the landlord will default on the mortgage note, and assume the existing lease. The high penalty lays out what the resulting liability and responsibility will be for each party in their new roles. Having a form of SNDA will allow everyone to pre-review and negotiate its terms.
- Tenant Estoppel Letter. This form of estoppel outlines the current tenant lease terms and represents that all parties are in good standing, no amounts are owed, no parties are claiming a default or non-material breach. The form and scope of representations are critical to pre-approve with your lender and other parties. These are also critical to review to ensure security deposit amounts match seller statements and lease requirements.
- Other Exhibits. Other exhibits that I’ve had will include as-built plans, construction contracts, work letters, zoning, state incentive agreements, property tax abatement agreements, etc. Any type of major contract that affects the real property should be listed as due diligence or attached to the PSA.
That’s it for an Office Purchase and Sale Agreement (PSA)! If you are interested in purchasing or selling an office building, contact Ronald Rohde Law and we would be happy to walk you through this transaction.
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