Your firm has previously constructed a multifamily housing property. The property looks great; it has strong cash flow, and your company has a number of offers from potential buyers to purchase the property. You can pick an offer, have the purchase and sale agreement drafted, and you will be set, right? Not so fast! There are a number of significant provisions within the agreement that you, the seller, should pay close attention to.
In case of a seller’s default, the seller could limit the purchaser’s remedies to the following: (i) terminating the agreement and receiving a return of the earnest money, or (ii) enforcing specific performance of the agreement. Some purchasers may also demand that, as another remedy, the purchaser may seek monetary damages for a seller’s default to cover the purchaser’s pursuit costs. If the seller agrees to this remedy, he should make certain that the damages are capped at a specific amount, and that the damages are for the purchaser’s actual, out-of-pocket damages (as set forth by evidence of the actual expenditures of such expenses to third parties).
2.) Representations and Warranties
In this author’s experience, most sales of properties today are “as-is, where-is” sales. An “as-is, where-is” sale presupposes that there will be no seller representations and warranties. However, that is not normally the case because the purchaser may request some representations and warranties. If the seller agrees to make representations and warranties, such representations and warranties should be limited. For instance, the seller should be certain to make no representations and warranties regarding the condition of the property. It is the purchaser’s obligation and responsibility to thoroughly examine all relevant information relating to the property, including a physical inspection of the property, and the purchaser must come to his own conclusion as to the condition of the property (rather than rely upon any representations and warranties by the seller). If any representations and warranties are to be made by the seller, such representations and warranties should be limited to warranties of title, limited warranties that the seller has the right to carry out the actions required by the agreement and limited formation representations. The seller should qualify any representations and warranties with a knowledge component (i.e., to the seller’s actual knowledge, with no imputed knowledge and with no duty to investigate or make inquiry).
3.) Inspection Period
It behooves sellers to make certain that the agreement provides that purchasers have an opportunity to perform their due diligence inspection of the property to determine if it is fit for the purchaser’s intended use. Sellers should provide sufficient time and access to the property for the purchaser’s inspection. After the sale is completed, the seller does not want to be in a position wherein there is a problem with the property and the purchaser alleges that it did not have enough time or access to identify the particular problem.
4.) Insurance, Repair & Indemnity
What recourse and protection does the seller have against a purchaser that damages the property during the purchaser’s inspection period? First, the seller may want to require the purchaser to maintain liability insurance during the inspection period to cover any damage done to the property that arises out of the purchaser’s activities, and such insurance should name the seller as an additional insured. Secondly, the agreement should obligate the purchaser to repair damages caused by inspections and tests during the inspection period, and to protect, indemnify and hold the seller harmless from and against any liens, claims and other liabilities incurred by the seller as a result of the purchaser’s activities on the property during the inspection period. Additionally, the seller should make certain that that the purchaser’s obligations survive the termination of the agreement and that there is a sufficient amount of earnest money in case the purchaser has limited assets.
5.) Time is of the Essence
Failure to perform an obligation set forth in the agreement within a specific time period may not result in a breach or default of the agreement. This is because, in some jurisdictions, the general rule is that time is not of the essence unless the agreement expressly so provides. Consequently, with respect to real estate transactions, time may not be of the essence unless the parties have expressly intended for time to be of the essence. When time is not of the essence, courts may permit parties to perform their obligations within a reasonable period of time (even if the agreement states that an obligation is to be performed within a specific period of time and/or on a specific date). Therefore, in order to ensure that purchasers perform their obligations within required time frames, sellers should make certain that the agreement has a provision within it that explicitly states that time is of the essence of each provision within the agreement.
The issues set forth above are just a few of the issues to which sellers should pay close attention. A seller’s failure to adequately address these issues in the agreement could result in the seller incurring liabilities and risks that it could have otherwise avoided.
Brett L. Slobin is an attorney in the Houston law firm of Slobin & Slobin, P.C. His practice focuses on commercial real estate and business law issues.