WHO SHOULD PREPARE THAT PURCHASE AND SALE AGREEMENT?
Purchasers or sellers of real property or a business often have their brokers/agents prepare the purchase and sale agreement for the property or the business. But, is a broker/agent really capable of preparing a detailed legal contract that could represent a major life changing event for you?
Brokers/agents often use pre-printed form agreements as a one-size fits all document without fully understanding all the provisions of the agreement, or more importantly, what is missing from those agreements. In using these pre-printed forms, be cognizant of the fact that the blanks are being filled in by a non-attorney. Where the document is being prepared by a non-attorney, it is incumbent upon the buyer or seller, at a minimum, to closely review the agreement and make sure everything is correct as to the information inserted. However, such buyers or sellers should also have their attorney review the purchase and sale agreement and the underlying transaction to make sure the contract contains all of the necessary provisions.
The benefit of using a pre-printed form prepared by the broker/agent is the savings of attorneys fees and time. However, are you really saving anything if the subject agreement does not contain all the provisions that would be appropriate for your transaction and you end up in litigation over the contract or you run into adverse tax consequences as a result of the provisions of the agreement?
Provisions contained in a purchase and sale agreement are a matter or negotiation. Depending on the bargaining strength of the parties as to whether or not the property or the business may be purchased by someone else will dictate whether various provisions will be agreed to by a seller or buyer. Some issues that should be considered but are often not present in some pre-printed forms are the following:
As-Is, Release of Claims. Some pre-printed forms will provide that the buyer is purchasing the property or business in an “as-is” condition. If it does not, it should. In addition to this provision, the contract should also contain a release of claims provision by the buyer against the seller. The release of claims provision should cover known issues and unknown issues and should specifically reference California Civil Code Section 1542 and specifically set forth the exact language from Section 1542. This provision benefits a seller and provides some protection against claims brought after closing.
Tenant Issues. If you are purchasing or selling either residential or commercial property that has a tenant in place, does the agreement cover prorations of rents and security deposits? Are you obtaining a tenant estoppel certificate that will set forth whether or not the tenant has any current claims against the landlord?
Representations and Warranties. Whether a purchase or sale of real property or a business, does the contract contain sufficient representations and warranties from the seller. Depending on the complexity of the transaction, the representations and warranties should be equally all-encompassing. Some pre-printed forms contain representations and warranties, but they may not be as encompassing as appropriate. As an example, if you are purchasing a business, is there a representation and warranty from the seller regarding taxes? Have all returns been filed, all taxes paid, or is there an audit presently going on? If a business subject to the Bulk Sales Laws, will the escrow follow the Bulk Sale Law notice requirements? If these issues are not addressed, a seller’s tax liabilities could become the liability of the buyer.
Allocation of Purchase Price. Whether the purchase of a business or property, does the agreement cover the allocation of the purchase price? For example, for a business, what portion of the purchase price is being allocated to the assets, and to which assets? What portion is being allocated to goodwill? For real property, what portion of the sales price is being allocated to the land, and what portion to depreciable portions of the property? These allocation issues can have tax impacts to both the buyer and the seller and sometimes need to be negotiated. These issues can be very important and most pre-printed forms do not cover this issue.
In addition to the foregoing, there are other contractual issues in pre-printed forms that can be problematic that are beyond the scope of this short article. At a minimum, all contracts prepared by a non-attorney should be reviewed and commented up by an attorney. Although you may be saving time and money up front using a pre-printed form prepared by a broker/agent, you may be costing yourself money in the long run. Be careful out there.
– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation. Mr. Harrel may be reached at 209-952-4545 or jwh@caloneandharrel.com