Property purchase checklist
Although it is generally a good idea to have a written agreement for every contract, by law, the purchase of real property in Nevada must happen through a written purchase agreement.
The written agreement must state the consideration to be paid for the property. The parties otherwise have wide latitude in drafting and negotiating the purchase agreement. In addition to the price and the mechanics of closing (when, where, how), there are a number of provisions which could be very important to the parties that should be included.
While not an exhaustive list, the following should be considered:
Representations and warranties and condition of the property
A purchase agreement may include provisions dealing with the condition of the property and representations and warranties by the seller. A seller of property will want to limit liability by either selling the property as-is or providing representations only to the seller’s knowledge or based only upon conditions which occurred during the seller’s ownership of the property.
Where a buyer insists on extensive representations about the property, such as its condition, the seller may counter with a limited survival period after closing for the representations or limit liability to a certain dollar threshold.
A buyer faced with a seller reluctant to give representations as to the condition of property may ask for a longer due diligence period and wider latitude in conducting tests and inspections of the property to ascertain the condition.
Real property purchase agreements typically provide for the status of title at closing, the nature of title insurance to be obtained and the party responsible for paying for title insurance. The buyer will typically review the status of title before the expiration of any due diligence period and will provide the seller with its objections. A seller will generally want to provide that it has the option, but not the obligation, to cure any title objections by the buyer to eliminate the possibility that the seller will be forced to spend a significant portion of the consideration being paid by the buyer to cure every title objection.
Conversely, the buyer will want the seller to have an obligation to remove all objections within its reasonable control or which may be removed by the payment of money to avoid giving the seller a free “out” under the agreement.
Proration of rents
The purchaser of income-producing property will need to consider how to handle payment of any delinquent rents that are received after closing. A seller will want to provide that rents received by the buyer after closing will first be paid over to the seller to the extent of any past due rents.
A buyer will argue that the failure of the seller to timely collect rents by the seller should not prejudice the buyer as the current owner of the property. The parties will also need to consider whether the seller will be limited in its ability to sue an existing tenant for past due rent prior to closing and/or whether the current owner will undertake any collections efforts on behalf of the seller.
Many buyers simply want their tenants to be left alone by the prior owner and will try to restrict the seller’s ability to collect rents by a suit.
In the purchase of commercial property, it is typical for the buyer to make an earnest money deposit with a title company within a short period of time after signing the purchase agreement.
The amount of the deposit varies, depending upon the purchase price of the property, and is often used by sellers as a way to verify the good faith intention of the buyer to proceed. Generally a purchase agreement will provide that a deposit is refundable if the buyer does not elect to proceed with purchase of the property upon expiration of the due diligence period, a condition to closing is not satisfied or the seller defaults.
If the purchase agreement provides that the only remedy a buyer has upon a seller default is return of the deposit, the agreement can easily be breached by a seller who finds a buyer offering a better price or who simply decides to keep the property.
Where a significant pre-closing expense might be incurred by the buyer, such as extensive due diligence investigations, parcelizing or zoning approvals or lender commitment fees, the buyer may wish to consider imposing an obligation on the seller to reimburse those fees or simply provide that the seller will be liable for all damages in the event of the seller’s breach.
Return of the deposit is often combined with giving the buyer the right to seek specific performance of the agreement by the seller. The earnest money deposit can also be a useful shield to the buyer by designating the deposit as liquidated damages which the seller is entitled to retain in the event the buyer defaults in purchasing the property, as the seller’s sole remedy. This provides certainty to the buyer that in most cases the limit of the buyer’s liability will be the deposit.
The circumstances of a particular transaction will dictate the specific provisions a buyer or seller will want to include in the purchase agreement. Use restrictions, the satisfaction of certain conditions to closing, such as obtaining privileged licenses or zoning approvals, and what happens if the property is damaged prior to closing are all issues that should be considered as well.
Colleen Dolan is an attorney with Fennemore Craig. Ms. Dolan practices in the areas of real estate development, general real estate transactions, leasing, commercial finance and corporate law. She can be reached at email@example.com.
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