Provisions concerning settlement, often the most lengthy in real purchase contracts, usually address:
|1.||The date by which settlement must occur.|
|2.||The place where settlement must occur.|
|3.||A definition of what must be done by both parties in order to deem the settlement completed (e.g., the purchaser delivers that part of the purchase price to be paid in cash and the seller delivers an executed deed.|
|4.||What the seller is required to deliver prior to settlement—any affidavits or other documentation that will allow the title agent to remove exceptions to the title or to assure the title agent that the seller has authority to execute the deed.|
|5.||What the seller is required to deliver at settlement—a bill of sale for all personal property and an assignment of insurance, contracts, permits, and licenses.|
|6.||Any remedies available to the parties should either breach the terms of the contract (e.g., seller retains the deposit or purchaser secures the return of the deposit or sues for specific performance).|
Provisions concerning the tenancies of existing and future residents of a tenanted property are common in purchase contracts.
The parties usually will use these provisions to acknowledge the fact that the property is being sold subject to the existing tenancies. A purchaser may be very concerned, however, that the seller may change the terms of these tenancies (e.g., provide life-tenancies to the seller’s family members) or terminate the tenancies (thereby cutting off cash flow to the purchaser after settlement) between the time when the contract is executed and the settlement date. The purchaser may include in the purchase contract a provision that prohibits the seller from modifying the terms or terminating any tenancies without the purchaser’s approval.
The purchaser may be very concerned about how units will be filled if they become vacant between the time when the contract is executed and the settlement date. This concern will be especially acute if the purchaser is a resident group that needs a certain percentage of existing tenants to successfully complete a purchase and conversion of a multifamily property to homeownership.
Under either scenario, the purchaser will want the opportunity to place tenants who are supportive of the purchaser’s cause (in the case of a resident group), or who meet the purcahser’s guidelines, into the vacant units prior to settlement.
Generally, the seller should have no objection to a reasonable vacancy clause in the purchase contract as long as the seller is not being asked to accept high-risk tenants during the contract period.
Risk of Loss
The purchaser must demand that a “risk of loss” provision be included in the purchase contract. A “risk of loss” provision states that the seller is solely responsible for any loss or damage to the property from the date that the contract is executed until the deed of conveyance is delivered to the purchaser or recorded by the title company after settlement. Clarifying liability for the property is very important because the execution of the purchase contract actually creates a legal interest for the purchaser in the property. This provision lays the responsibility for any loss to the property clearly in the hands of the seller regardless of the purchaser’s property interest created by the contract.
Conditions and Operation of the Property
Four basic considerations are usually addressed in this provision:
|1.||The seller’s concern that the purchaser knows that the property is being sold in its current condition with no additional improvements.|
|2.||The purchaser’s concern that it is not buying liabilities caused by longstanding housing code violations.|
|3.||The purchaser’s concern that the seller not allow the condition of the property to deteriorate further between the time that the contract is executed and the settlement date.|
|4.||How events of fire or casualty loss and condemnation or eminent domain are handled.|
“As Is” Sale.
Most properties are sold in “as is” condition. “As is” condition means that the property will be conveyed by the seller substantially in its existing condition, both good and bad. If a purchaser enters into an “as is” purchase contract, he must make sure that this clause specifies whether the “as is” condition is the condition of the property as of the date when the contract is executed or the condition of the property as of the settlement date.
A clause allowing the seller to transfer the property in “as is” condition as of the settlement date potentially causes two major problems:
|1.||The seller has an opportunity to neglect the property after the contract date, especially if the contract fails to contain a provision on further property deterioration.|
|2.||The seller might remove some or all of the personal property on the site, especially if the transfer of personal property is not required under the contract.|
Outstanding Housing Code Violations.
A purchaser of a tenanted property will want assurances from the seller that the purchaser is not buying any current liabilities for past or existing housing code violations or other violations of municipal orders or regulations such as operating the property without a business license, if required. The purchaser may require the seller to make an affirmative statement to that effect in the provisions concerning the operation of the property or in the provisions addressing representations and warranties being provided by the seller.
Further Property Deterioration.
The purchaser should be sure that the purchase contract requires the seller to:
|1.||Not defer normal maintenance of the property during the period from contract execution to settlement.|
|2.||Not enter into, modify, or terminate, without the purchaser’s consent, any maintenance or service contracts relating to the property prior to settlement.|
|3.||Maintain in force until settlement all insurance coverage, including liability and property damage insurance with respect to the property, that was in effect as of the date of contract execution.|
This provision will allow the property to be conserved in its condition as of the contract date and will make sure that insurance proceeds potentially will be available to the purchaser should it choose to go forward with the purchase after a fire or other casualty to the property
Many purchase contracts have specific provisions that address the rights of the purchaser and the seller in the situation where the property has been damaged or destroyed by fire or other form of casualty, or where the property has been taken, in whole or part, by government action. These provisions commonly give the purchaser the option of canceling the contract and receiving the full return of the earnest money deposit and interest if the property is destroyed, damaged, or taken by government action, or of continuing on with the contract and receiving all or some of the proceeds that the seller had the legal right to receive.
Inspection by Purchaser
The purchase contract should provide the purchaser with the right to inspect all aspects of the property, including the books and records of the seller, and to conduct at the property all tests and studies that the purchaser decides are necessary. Because of the potential cost of addressing environmental problems, the purchaser may want to specify in the contract that it has the right to conduct a Phase I environmental study on the property. Without this clause, the seller could deny the purchaser the right to perform the environmental work, because of the potential liability that the seller could be exposed to once it had knowledge of environmental problems found by the purchaser in its study.
A seller will usually require the purchaser to agree to pay all the costs of the studies and inspections performed on the site, including the costs to repair damage to the property caused by the inspection. A seller also may want copies of all reports and inspections completed. Providing these copies usually in negotiable.
Representations and Warranties of Seller and Purchaser
Purchase contracts may include a separate provision that states the specific representations and warranties made by the parties to each other. As strictly a legal matter, warranties are promises made by the party as part of the contract (e.g., the seller warrants that all service contracts can be canceled in 30 days) and representations are assertions of material facts that commonly convince the other party to enter into the contract (e.g., the seller is the sole owner of the property and can freely transfer it).
Generally, a breach of a warranty can result in the payment of damages to the nonbreaching party, but a misrepresentation of a material fact can result in the contract’s being set aside.
Representations and warranties can cover almost any topic. The most common seller representations and warranties are that the seller has full right and authority to sell the property, that the facility currently being operated at the property is operating legally, and that the seller knows of no action, including litigation or condemnation contemplated or pending, that would affect the property.
The most common purchaser representations and warranties are that the purchaser has full right and authority to purchase the property and, if a corporation, that the corporation is in good standing in its state of incorporation and in the state where the property is located, if different.
Choice of Law
The parties should agree that the laws of one jurisdiction apply to any disputes that arise under the contract. Most, if not all, real estate contracts have the parties and the terms of the contract subject to the laws of the jurisdiction where the property is located. This generally is an issue only if the purchaser and seller are from different jurisdictions.
The purchase contract should have a provision concerning real estate brokers whether or not a broker was used to complete the sale. The exact compensation that will be due to a real estate broker for services provided to either the purchaser or the seller, if any, should be stated in the contract unless it is covered by a separate real estate listing agreement. If neither party used the services of a broker, then the contract should state that fact specifically. In some cases, the seller and the purchaser will represent and warrant to each other that neither used a real estate broker in the transaction. The parties may even agree to hold each other harmless should a broker appear and claim that one of the parties is liable for brokerage commissions.
Time of Essence
Many purchase contracts will include a “time of essence” clause. This clause serves to hold both of the parties to the timetables agreed to in the contract. For example, if settlement is to occur in 120 days but has not occurred as of day 121, absent other circumstances, the contract can be terminated at that time by the seller because of the time of essence clause. Unlike option agreements, as discussed below, settlement on purchase contracts usually will be continued for a reasonable time for cause if no time of essence clause is included.
Many purchase contracts will include a provision that states specifically how long the seller has to accept the contract and defines the date when all the time periods begin to run, for example, 120 days until settlement.
Many purchase contracts will have one or more provisions clearly stating that:
|1.||The contract is binding on both parties and any future successors or assigns.|
|2.||The contract is the final and entire contract between the parties, and they shall not be bound by any terms, conditions, statements, warranties, or representations, oral or written, express or implied, not contained in the contract.|
|3.||The contract cannot be modified unless in writing by both parties.|
Hire an Experienced Real Estate Lawyer
Each purchase contract must be customized to meet the requirements of the specific transaction. Hire the service of an experienced Draper Utah real estate lawyer to prepare your purchase contract.
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