4 Crucial Tips When Negotiating a Purchase Contract

As a real estate attorney, I regularly assist my clients, including JB2 Investments, in acquiring multifamily investment properties across the Midwest. Knowing I am a major nerd about contract drafting, Jonathan and Jeffery asked me to contribute an article to this blog sharing key insights and concerns I see for clients when negotiating purchase contracts for multifamily properties.

As prudent and detail-oriented as most of my clients are when analyzing a potential acquisition, few truly understand or care about every term in the purchase contract presented to them by the brokers. I’ll admit that contract terms like purchase price, contingency deadlines, and closing date are most critical. However, many of the standard “boilerplate” terms can have serious implications for the parties if certain situations arise during or after a transaction. My goal for this blog post is to focus on frequently overlooked contract provisions (you know, the ones on page fifteen of the contract that you skim with glazed over eyes) and discuss why you should take the time to understand the purpose of these provisions and why they matter.

Rent Proration

Pay careful attention to how the contract handles past due rent proration to prevent any surprises following closing. Rent proration contract provisions range from the very simple to the extremely complex (typically increasing in complexity as the number of units increase). It is common for the seller to retain the right to collect past due rents after closing in larger transactions. The contracts often obligate the buyer to send the seller any past due rents the buyer collects from delinquent tenants after closing. Confirm you understand the priority of delinquent tenants' payments and which party gets paid first, and if you don’t understand, ask your attorney. Also, if your contract contains such a provision, make sure your property management and accounting systems are structured in a way to allocate these payments appropriately.

Representations & Warranties

Real estate is typically sold on an “AS-IS” basis. The expectation is that the buyer will investigate the property and perform all of its due diligence before closing. The seller's representations and warranties in the contract are one of the few exceptions to this rule and, if aggressively drafted, may give the buyer the ability to go after the seller for misrepresentations or other defects discovered after closing. Pay careful attention to how long a seller's representations and warranties survive closing, as many contracts state that the seller's representations and warranties terminate at closing, thus preventing the buyer from pursuing the seller for a breach of a material representation. A post-closing survival period between 6 and 24 months is typical and provides necessary assurance to a buyer.

Remedies Provisions

In many contracts, it's common for the buyer's only remedy for breach of contract by the seller to be the return of the buyer's earnest money deposit. This isn't much of a remedy at all. It does nothing to compensate the buyer for its due diligence costs or deter the seller from opportunistically canceling the contract if they receive a better offer. An ideal buyer's remedy provision will allow the buyer to pursue the seller for any and all damages incurred and, at a minimum, should obligate the seller to reimburse the buyer for all out-of-pocket diligence costs incurred by the buyer before the breach.

Notice Section

All purchase agreements contain a provision specifying how parties are to give written notice to each other. These provisions sometimes allow email notice, but these often require the email notice to be followed by written notice delivered via overnight carrier before the notice becomes effective. If you decide you need to cancel a contract a few days or hours before your earnest money becomes non-refundable, confirm you understand the notice process required by the contract and follow it without exception. Doing so will prevent any argument by the seller that you failed to provide adequate notice and that they should be entitled to keep your earnest money deposit.

Contracts for the purchase and sale of real estate are full of important terms that affect the parties' rights and obligations in important ways. The bottom line is that, while many contract terms need not (nor should) be significant deal points. It pays to understand how those terms affect your rights as the buyer both to negotiate your way into the strongest contract position and to ensure efficient and transparent contract administration.

Shelby Wood is a real estate attorney practicing with the law firm of Spencer Fane LLP. He can be reached at 816-292-8357 or swood@spencerfane.com.

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information provided is for general informational purposes only.  Readers should contact their attorney to obtain advice with respect to any particular legal matter.