What to Know Before Buying Commercial Real Estate: Common CRE Agreement Terms

An agreement of purchase and sale is a written contract between a property owner and buyer for the purchase and sale of a particular property. It specifies the rights and liabilities of each party, describes the real estate property including its fixtures and chattels, lists the price, and defines contingencies for transaction close. Certain clauses relating to the requisition date, the time within which the purchaser must examine the property, and completion date are first to consider. The purpose of a well-written and thorough CRE agreement is to combat conflicts that may arise after the property’s sale. It is important to pay attention to some important terms that one might commonly encounter.

Common CRE Agreement Terms

1.   Title Search: A title search is an examination of public records to determine and confirm a property’s legal ownership and to find any claims or liens on the property. A clean title is required for any real estate transaction and complications can affect its value.

2.   Property Description: A description of a property’s legal address, dimensions and included property interests such as licenses, intellectual property, and warranties. A survey or title insurance is bought by the purchaser during due diligence for protection against property description issues.

3.   Due Diligence: A purchaser’s review of a commercial property during a what is called a “contingency period,” an “evaluation period,” an “inspection period,” or a “due diligence period.” The length of the inspection period is frequently negotiated and a key term in any letter of intent and areas of investigation generally undertaken by a buyer can be broken down into (a) title and survey; (b) environmental, (c) property condition, and (d) financial components.

4.   Purchase Price: The purchase price is typically a set amount, subject to adjustments at closing. These adjustments may include closing expenses, real and personal property taxes, assessments, rent and security deposits.

5.   Buyer’s Contingencies: If the buyer is unsatisfied with the property or contract during due diligence, a buyer’s contingencies clause (a) gives the seller the opportunity to make the item satisfactory, (b) allows the buyer to accept the shortfall or (c) terminate the contract.  

6.   Financing: Outlines whether the buyer is financing the transaction with cash, seller financing, or a third-party lender. If the buyer cannot secure favourable credit terms, this clause allows them to terminate the contract.

An understanding of common agreement terms above will allow you an advantage in negotiating a more favorable contract.