By Tenant Advisory Group · Updated
Short answer
The terms that matter most to a commercial buyer are when the earnest money becomes non-refundable, how long due diligence lasts and how you terminate, what the seller represents and for how long, what conditions must be met before closing, and what remedies each side has on default. These agreements are negotiated, not filled in, so your attorney should lead the drafting.
How the agreement gets written
A commercial purchase agreement is usually a custom document. Maynard Nexsen notes that these contracts are generally prepared for the specific transaction by an attorney for the buyer or the seller, not completed on fill-in forms, and that controlling the first draft is often a good idea. A signed letter of intent does not make the contract a formality. Details the term sheet left out still have to be negotiated.
Bargaining strength shapes all of it. The authors of a Michigan Bar Journal article on these agreements observe that a seller wants a bound buyer with few warranties, a buyer wants open-ended time to review the property, and neither side gets everything. In a seller-favoring draft they describe minimal warranties, short due diligence and larger deposits that go hard soon after signing. The article is from 2005 and Michigan-based, so treat it as a description of the issues, and have your own attorney apply current law where the property sits.
The sections below cover the business terms worth understanding before your attorney starts trading drafts.
Earnest money: amount, holder and when it goes hard
The deposit is delivered at signing or shortly after, and it is commonly held in escrow. The questions that matter are how it is applied, when it can be released to the seller or returned to you, and whether it earns interest.
The term that matters most is timing. The Michigan Bar Journal article describes the usual practice as a deposit that becomes non-refundable after the inspection or due diligence period ends, and notes that an extension of that period may call for an additional deposit. Kleiner Law Group adds that the deposit deadlines should line up with the due diligence timeline, so funds do not go hard before your investigations are finished.
The deposit can also serve as the seller's liquidated damages if you breach. That limit on your exposure is valuable, so read it closely with the remedies section described below.
Due diligence and contingencies
The inspection period is often heavily negotiated. There is a real trade-off here: the same article explains that the more time a buyer has to inspect, the less it has to rely on the seller's warranties, and the shorter the period, the more representations will be required of the seller. It also advises being clear about what starts the clock, usually the buyer's receipt of the survey and title commitment, and notes that you may want a separate environmental review period.
Kleiner Law Group warns that missing the deadline can end your ability to walk away without financial consequences, so pay attention to the termination procedure as well as the length. If notice has to be delivered in a particular way by a particular hour, your team needs to know that.
One point catches many owner-users: financing. Maynard Nexsen says that, unlike residential contracts, commercial contracts do not often include a financing contingency, on the assumption that the buyer resolves financing during the inspection period. If your loan needs a third-party appraisal or a program approval that may take longer than the inspection period, raise that early, and either negotiate a contingency or size the period to match your lender's real schedule. Your lender can tell you what it needs and how long it takes.
Build the schedule backward from the date your deposit goes hard. Every report, lender step and attorney review needs to finish before that date, with some slack.
Seller representations, closing conditions and covenants
These three categories do different jobs, and Maynard Nexsen separates them clearly. A representation is a statement of fact by the seller, for example that the property is free from hazardous substances or complies with all laws. A covenant is a promise to do or not do something, such as delivering property information, operating as in the past and not modifying leases. A condition of closing is a fact which, if not true, lets the buyer terminate and typically recover the earnest money. Typical conditions include no change in the property's condition, continuing accuracy of the representations and the seller's performance of its covenants.
The representations worth asking about are the things you may not be able to find on your own. The Michigan Bar Journal article lists items such as no unrecorded liens, no pending litigation or judgments against the seller, no outstanding leases or other parties with rights in the property, and legal compliance. It also advises buyers to get strong representations and not simply rely on title insurance, because policy claims can be slow and contested.
Sellers push the other way, especially with as-is language. Bean Kinney flags a purchase that is completely as is with no surviving representations as a non-routine term to review carefully. Ask how long each representation survives closing, whether claims are capped, and whether the party giving it will have assets after the sale. Those three answers decide what the promise is worth. Limits like these vary by deal, so have your attorney address them directly.
Closing mechanics and default remedies
At closing, Maynard Nexsen says, the seller typically delivers documents such as the deed, an owner's affidavit and a closing statement, the buyer delivers the purchase price and signed documents, and the parties allocate taxes, utility charges and other items of income and expense. Kleiner Law Group adds that closing conditions may include title clearance, lender approval and specific repairs, and that the agreement should state the closing date and how extensions work. Who pays which transfer taxes and how property taxes are prorated depend on local law and the contract, so ask your attorney for numbers before you finalize your cash plan.
Remedies are the other heavily negotiated area. A seller's remedy is often limited to keeping the deposit, though some contracts allow more. A buyer will want specific performance, the right to force the sale, along with other remedies, and the Michigan Bar Journal article notes that an agreement entitling the buyer only to a refund may limit its options.
Finally, check assignment. Kleiner Law Group notes that buyers often ask for the right to assign the contract to a related entity before closing. If you may take title in a separate company, that right should be in the agreement from the start.
A negotiating checklist for your deal team
Tenant Advisory Group represents the buyer in the business negotiation and works alongside your attorney, who drafts and advises on the contract. These are the questions to settle together before the first draft goes out.
- When does each deposit go hard, and does that date come after every report and lender step?
- What starts the due diligence clock, and how exactly do we terminate?
- Do we need a financing contingency, or can the inspection period cover the lender's timeline?
- Which seller representations do we need, how long do they survive, and is there a cap?
- Is the deal as is, and if so, what exactly are we giving up?
- Can we recover our deposit if a closing condition fails or the seller cannot cure a title objection?
- What can we do if the seller refuses to close?
- Can we assign the contract to the entity that will take title?
- If the current occupant is staying for a period, or leases exist, who handles estoppels, possession and move-out dates?
- Do our closing date and the end of our current lease work together?
Frequently asked questions
Is earnest money always refundable during due diligence?
Not automatically. It depends on the contract. The usual practice is a deposit that goes non-refundable when the period ends, but some seller-favoring drafts make it hard much sooner, so read the exact wording.
Do commercial purchase agreements include a financing contingency?
Often they do not. Maynard Nexsen notes that the assumption is the buyer resolves financing during the inspection period, so confirm your lender's timeline before you agree to dates.
Who should draft the purchase agreement?
Either side's attorney can, but controlling the first draft is often a good idea, and many buyers prefer that their attorney prepare it. A broker does not replace legal counsel on the contract.
Sources
This guide is general information, not legal, tax, lending or accounting advice. Have your attorney, CPA and lender review any purchase before you commit to it.