Negotiating Complex Purchase Agreement Terms

Several provisions have outsized impact on risk and return. Due diligence period: longer periods (45-60 days) give more time for thorough investigation but may make the offer less competitive. During the DD period, the buyer can typically terminate for any reason with earnest money returned. Financing contingency: protects the buyer if financing cannot be obtained on specified terms. Define specific terms (rate, LTV, amortization) that must be met for the contingency to be satisfied. Representations and warranties: the seller's written statements about the property. Key reps: no pending litigation, no environmental contamination known, rent roll is accurate, no undisclosed agreements affecting the property, and all building systems are in working order. The survival period (6-12 months post-closing) determines how long the buyer can bring claims for breaches. Indemnification: the seller's obligation to compensate the buyer for losses from breaches of representations or pre-closing liabilities.

Several provisions specifically allocate risk between the parties. Casualty provision: if the property is damaged between contract and closing, the buyer's options depend on the damage severity. Minor damage: seller repairs and closing proceeds. Major damage (typically >10% of value): buyer has the option to terminate with earnest money returned, or proceed with insurance proceeds assigned to the buyer. Condemnation provision: if part of the property is taken by eminent domain during the contract period, similar options apply. Material adverse change (MAC) clause: allows the buyer to terminate if a material adverse change occurs in the property's condition, financial performance, or legal status between contract execution and closing. Tenant estoppel requirements: the seller must obtain estoppel certificates from tenants confirming lease terms, rent amounts, and security deposits. Discrepancies between estoppels and the rent roll create negotiation leverage.

Earnest money provisions determine the financial stakes if the deal falls through. Standard structure: earnest money (1-3% of purchase price) held in escrow, refundable during the due diligence period, and "going hard" (non-refundable) after the DD period expires. Variations include: day-one hard money (non-refundable from contract execution—used in competitive situations), phased hard money (portion goes hard at DD expiration, additional portion at financing commitment), and performance deposits (additional deposits at specific milestones). Buyer default: if the buyer fails to close without a contractual right to terminate, the seller typically retains the earnest money as liquidated damages. Some agreements also include specific performance provisions (the seller can force the buyer to close). Seller default: if the seller fails to close, the buyer's remedies typically include return of earnest money plus actual damages, or the right to pursue specific performance (forcing the sale).