In our latest upcoming series of blog posts, we will look at several key points to consider when negotiating commercial real estate purchase and sale agreements from the perspectives of buyers and sellers.
The first post in our series offers suggestions for negotiating the letter of intent. The letter of intent, although usually non-binding, is an important first step in the commercial real estate contract process. It makes the agreement as to business terms clear, sets expectations of the parties, and serves as a guide for the contract negotiation process going forward.
The following are the key points to address in the letter of intent (the “LOI”):
- Purchase Price: The LOI should specify the purchase price and how the purchase price shall be paid. The Seller and Buyer should consider the amount of the deposit and whether there will be an additional deposit after expiration of any due diligence period. In addition, the Seller and Buyer may agree to a purchase money note at closing, rather than cash due at closing. In such cases, the terms of such purchase money note and any security should be specified in the LOI.
- Deposit: Issues to consider include the dates upon which the initial deposit and any additional deposits are due, the party who will hold the deposit, whether the deposit will be refundable, and whether it will become non-refundable at a certain point or under certain circumstances. The parties in commercial real estate transactions often agree to have the buyer’s title company hold the deposit.
- Due Diligence Period: The LOI should make clear the timing of the diligence period and scope of diligence activities.
- Financing: The terms of any financing contingency should be addressed in the LOI, including the timing and expiration of the financing contingency period, acceptable forms and term of financing, and Buyer’s termination rights.
- Title Insurance: The LOI should address whether the parties agree to any permitted encumbrances, Seller’s obligations to deliver clear title at closing, any Seller cure rights with respect to any encumbrances, and which party will obtain and pay for the title commitment and title policies (which is often based on custom in the area in which the property is located, but can be negotiated by the parties).
- Closing Costs. Responsibility for common closing costs that should be covered in the LOI include title company fees for settlement services and disbursements at closing, realty transfer fees, document preparation fees, and recording fees. As with responsibility for payment of title insurance searches and premiums, these costs are also usually based on custom in the location where the property is located but can certainly be negotiated.
- Purchasing Entity: If a Buyer anticipates creating a new entity for the purpose of taking title to the property after the contract is finalized, Buyer should include in the LOI Buyer’s right to assign the contract to such entity prior to closing.
- Closing Deliverables and Conditions: The LOI should list the Seller’s and Buyer’s deliverables and conditions to closing. A Buyer will also want to obligate a Seller to provide tenant estoppels if there are leases being assigned at closing, Subordination Non-Disturbance and Attornment Agreements if required in connection with financing the purchase, and any other documents reasonably required by Buyer or its title company.
- Closing: The LOI should specify the closing date and location. It should also state any adjustments to be made at closing, including prorations for utilities, taxes, any applicable association fees, and any applicable tenant rents. Buyers may seek to include a right to extend the closing date, although depending on the circumstances of the transaction, both parties may benefit by building in an extension right.
- Miscellaneous: The LOI should also include any notice and cure periods for defaults, time of the essence clauses, 1031 exchange cooperation, any other contingencies such as zoning approvals.
This series of blog posts will explore each of the foregoing points in more detail. In our next blog post, we will examine the importance of negotiating purchase price and deposit provisions and will offer suggestions as to how a buyer and seller might each optimize their positions.