What are the key terms of a commercial sales contract?
- Feasibility Period (a.k.a. Inspection Period) is the time period Buyer has to review all information about the property (a.k.a. Due Diligence Information). Such “look” time comes at the cost of a negotiated Option Fee (a.k.a. Independent Consideration). An Earnest Money Deposit is an amount deposited by Buyer in escrow as a sign of good faith to pursue the purchase. The earnest money becomes non-refundable after the Feasibility Period expires, but is applicable to the sales price at closing. There may be additional fees for the right to extend the feasibility or closing time, which may or may not be applicable to the sales price at closing. Always insist on escrowing the earnest money deposit with a 3rd party title company. The other fees may be deposited either with the seller directly or the title company, as negotiated. It is important to note that both Seller and Buyer must sign off on the agreement to return and distribute the Earnest Money Deposit. Title companies cannot release the earnest money without the buyer and seller being in agreement, even if the contract provides directions for such distribution.
- Always ask for a survey of the property and submit it to the title company to examine it for any missing or incorrect information, as the current title report may show.
- Your lender will most likely require an environmental report called “Phase I report’, which consists of findings from public records and obvious surface observations. If reported environmental issues are found, or the property has or is located next to hazardous business sites, such as oil change facility or dry cleaners. Phase I report may suggest performing a Phase II report, which involves soil sampling. If you suspect the property may have issues and do not want to spend a lot of money on these reports just to confirm your suspicion, you may want to run a quick “desktop search”. Approximate costs of these reports: Phase I – $2,000-$2,500; Phase II sampling: $8,000-$12,000; Desktop Search: $350 – $550
- If there are tenants in the building, the buyer should request estoppel certificates from each tenant evidencing that the tenants and landlord are current on their lease obligations. Your lender may require some or all tenants to sign these estoppels. Sometimes, lenders allow some or all of these estoppel certificates to be signed by the seller only, which serve as affidavits.
- If the property is being sold with equipment or fixtures inside, the buyer should perform a UCC search (Uniformal Commercial Search) to find out if there are any outstanding liens on such equipment and if 3rd parties may have claims for such fixtures and equipment.
- Option #1: You can do it yourself by searching TX state SOSDirect system at https://www.sos.texas.gov/ucc/index.shtml . You can search by the tenant’s name (try both the company and personal) or by address
- Option #2: Use an agency to do it https://www.cscglobal.com/service/cls/ucc- search/
- Financing Contingency is a clause that allows you to cancel the contract and receive the Earnest Money deposit back at any time if you cannot obtain financing. These are not very typical in commercial contracts, and buyers need to line up their loans during the general feasibility period.
- Cash Offer does not mean that the buyer will be paying cash for the property, neither does it preclude the buyer from taking out a loan. It simply means that there is no financing contingency to the contract.
- Land sales/purchase contracts may contain more conditions associated with platting, reciprocal/access easement agreements, architectural review guidelines, access to wet and dry utilities, detention, and costs of providing the aforegoing. We strongly recommend hiring an experienced land broker to help you through land sales transactions.