Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Commercial Real Estate, September 2009
General
The paperwork for the transaction should reflect both the new realities of the marketplace and any preparatory work undertaken by the vendor. Purchasers are likely to be price-conscious, conservative, value-oriented and wary of vulnerable markets or property classes. The heady days of multiple bidders willing to pay higher than list price are gone. Agreements for the purchase and sale of commercial properties must be reasonable, incorporate sufficient time periods and reflect a middle ground between the interests of vendors and purchasers.
Preliminary Documents
Often, particularly if a real estate broker has been engaged by the vendor, it will be useful for the vendor and its broker to assemble the results of their preparatory work with respect to the property in a confidential information memorandum (CIM) to be delivered to prospective purchasers. A CIM typically discloses certain basic information with respect to the geographic market, the property for sale and the proposed offering process. Confidential rental information is usually included, so it is important from the vendor's perspective to couple the delivery of the CIM to prospective purchasers with a comprehensive confidentiality agreement. To the extent that the vendor has undertaken additional searches or investigations with respect to the property as part of its pre-sale planning, the results of these searches can and should be disclosed in the CIM. The CIM should make it clear that the information set out in it is being provided strictly for the convenience of prospective purchasers and is not to be relied upon.
Letters Of Intent
Letters of intent have traditionally formed an element of negotiating purchase and sale agreements once the purchaser has been identified. Although letters of intent are for the most part non-binding, they nevertheless serve the important purpose of bringing the parties together on basic deal points and establishing impetus for the transaction. Letters of intent disappeared from many commercial real estate transactions in the hot markets of 2007 and early 2008, but are now back in vogue. Key elements in a letter of intent include the following:
- Identity of the parties, including any contemplated assignment by the purchaser
- Purchase price, including amount and timing for deposits
- Property description
- Any unusual adjustments, such as an interest rate buy-down or square footage adjustment
- Timing for the due diligence period
- Timing for closing
- Whether representations and warranties will be included and, if so, their general nature
- Any important conditions, such as board approval, financing condition, mortgage approval, waiver of rights of first refusal, etc.
- Threshold for delivery of tenant estoppel certificates
- Threshold for termination by reason of damage or destruction
- Timing and responsibility for preparing the agreement of purchase and sale
- Confidentiality
Agreements Of Purchase And Sale
The critical element in preparing agreements of purchase and sale in today's marketplace is to be reasonable. Notwithstanding this, drafting responsibility (whether for the vendor's lawyers or for the purchaser's lawyers) continues to be important, because the manner in which the agreement is drafted in the first instance can tilt the dynamics and advantage in the transaction dramatically from one side to the other. Both the vendor and the purchaser will be interested to ensure that the transaction proceeds smoothly and efficiently. Provocative drafting positions, such as adjusting for rent on the basis of payments actually received or having the representations and warranties of the parties merge on closing, are to be discouraged. The vendor should err on the side of making more information available for review rather than less. Vendor's conditions, such as board approval or waiver of third party rights, should be avoided and, to the maximum extent possible, satisfied in advance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.