Purchases and Sales
A California real property purchase and sale agreement is a contract that is used for an exchange of real estate between a seller and a buyer. Generally, title passes to the buyer at the close of escrow.
Another form of California property purchase and sale agreement is called a California land purchase agreement. That type of agreement does not transfer title immediately to the buyer.
What Are Land Purchase Agreements?
Realtors in California typically use a vacant land purchase agreement to facilitate the sale of real estate. With this form, the current owner of the real estate and the interested buyer create a contract.
Sellers and buyers can include a variety of requirements in a California land purchase agreement:
- Purchase price and payment terms
- Interest rates
- Fees based on taxes and insurance
The person selling a piece of real estate will be responsible for covering a number of costs related to the sale. Although septic systems are rarely found on vacant lots, if there is a septic system, the seller will need to pay for an inspection. Similarly, the seller may need to pay for a hazardous waste test to see if the soil is suitable.
Other costs that the seller may be responsible for can include marking of the property corners and determining if the wells on the property produce an adequate amount of water.
Documentation and Disclosure Requirements
Land purchase agreements include a section where the seller will disclose important information about the property. This section will specifically require the seller to reveal any information that would be pertinent to the buyer. For example, if there is an endangered species that lives on the lot that may interfere with the buyer’s ability to use the property, the seller must disclose this information. The seller also needs to inform the buyer if the deed to the lot comes with any restrictions.
A land purchase agreement will also contain a section that outlines the Buyer’s Investigation period. In this section, there should be a list of items that a buyer should investigate to make sure that the property lives up to their expectations.
Buyers must complete their investigation in a set amount of time. While the default investigation period is 17 days, most buyers will request more time so that they can do their due diligence. A thorough investigation usually takes between 30 and 60 days. Sellers will also have a defined period where they will need to disclose information about the property. The default disclosure period is 10 days. Both the disclosure and investigation periods begin at the opening of escrow.
Once the Buyer’s Investigation is complete, the seller can ask the buyer to remove any contingencies they have placed on the agreement. If the buyer removes these contingencies, the seller may be able to keep the buyer’s deposit if they leave the agreement. Usually, the seller can only keep the deposit if they hold no fault for the buyer backing out of the deal.
No standard time period exists for contingencies or escrows. The defined period for these events can vary from agreement to agreement and are influenced by how long the buyer believes it will take to complete their investigation. Buyers should consider requesting a longer contingency period so that they can be sure that the property they’re interested in purchasing actually meets their needs.
Land Purchase Agreement Terms
Much of a land purchase agreement will consist of boilerplate terms. Some contracts, however, will contain additional information, meaning both buyers and sellers should carefully review the terms of any proposed agreement.
For instance, every land purchase agreement needs a full, accurate description of the property. If the description in the agreement is vague, or if the description doesn’t match the reality of the property, a condition should be added to the agreement that the purchase will only take place after an engineered survey. Banks will almost always insist on a survey when financing the purchase of real estate.
One of the buyer’s main goals in a purchase agreement should be negotiating a low price. The description of the price in the agreement must reflect the price agreed to during negotiations. The buyer should also request a low upfront deposit so that they will have the cash needed to cover important costs such as soil tests. Also, a low deposit means the buyer won’t lose as much money if they later back out of the sale.
Use of Printed Forms
Your Attorney should carefully review printed forms provided by brokers, title companies, escrow agents, and stationery stores before using them.
The advantages of using these forms are the following:
- that a printed form has a certain authority,
- some persons accept them readily, and
- the work needed to amend a form (and resulting cost to the you) may be less than that required to prepare an entire agreement.In addition, real estate brokers routinely recommend that their sellers consult with a real estate attorney regarding attorney-drafted contracts, for fear that giving advice regarding these documents could be alleged as the practice of law. This could put the buyer at a disadvantage in a competitive situation when other buyers may be offering on industry-standard forms with which the listing agent and seller will be more comfortable. Many such forms, however, contain provisions that may be objectionable, such as a provision that title is to be taken by the buyer “subject to covenants, conditions, and restrictions of record” or “subject to any state of facts an accurate survey would reveal.”If printed forms are used, they should be read carefully to ascertain the propriety and adequacy of their provisions for a particular transaction and their compatibility with the addendums so that the agreement as a whole is consistent and clear. You should not assume that you know what a printed form what it says; with laser printers, a document can be produced that looks familiar but that has actually been modified.
Weigh these factors when deciding whether to draft a completely new purchase agreement versus starting with an industry standard form and modifying by adding an addendum, thus making it suitable for the instant transaction.
TAX CONSIDERATIONS: Many printed forms do not properly consider tax issues, particularly California real property taxes and documentary transfer taxes. Mistakes or omissions in these areas can amount to more than the cost savings in using a preprinted or boilerplate form.
Generating Transactional Documents
Drafting and Adapting Forms
In drafting or revising the transactional documents, the lawyer bears a heavy responsibility for producing documents that achieve the parties’ wishes. The various forms available can be valuable drafting tools, but caution must be exercised when using them. Forms that lawyers frequently use include the following:
- Printed forms with blanks to be filled in, such as the California Association of Realtors® (CAR) exclusive authorization and right-to-sell form and residential purchase agreement and receipt for deposit or to a lesser extent, the AIR Commercial Real
- Our own forms that we generate based on our experience handling real estate transactions.The hazard in using ready-made forms instead of tailoring instruments to each situation is that they may be used uncritically and with insufficient attention to the comments that accompany them or to the reasons for using particular language.No ready-made form is a substitute for a document designed for the particular client’s situation. Nor can any form, however perfect it may have been when originally designed, remain equally dependable in the face of changing times and laws. When computer-generated or electronically generated forms are used, the hazard is magnified by the ease with which lengthy documents can be stored and then retrieved and modified for use in subsequent transactions. We recheck the entire form to make sure that a provision that does not fit the present transaction is deleted or changed as appropriate.
Nevertheless, there are sound legal and economic reasons for using forms in drafting instruments. Even if it is substantially supplemented and revised, a good form can provide a basis for the drafting process, especially when a new problem arises. Each of the basic types of form is a kind of checklist, protecting against inadvertent omission of necessary or desirable clauses. Moreover, a well-worded form offers protection against ambiguities that may result from drafting under a deadline. On the economic side, struggling anew with legal problems, organization, and special phrasing is a waste of productive time when these issues have already been carefully worked out.
Forms should be used with respect for their constructive uses but with awareness of their dangers. The forms should be chosen carefully and reviewed critically; annotations should be filed with office forms; drafting should be done only after reading the comments and annotations that accompany the forms; and the forms should be adapted to precisely meet the needs of the new situation.
2. Standard Forms; Boilerplate
Remember: there are no such things as “standard forms” and “boilerplate.” All provisions of a real property contract, whether typed or preprinted, are appropriate subjects for negotiation, and changes to forms should be made whenever needed to tailor the form to the terms of an acceptable deal.
TIP: Because changes in laws may alter the effect of form provisions, and because publishers have their own biases and may revise their forms over time, do not assume that a form’s provisions are “reasonable” or represent a compromise of the buyer’s and seller’s perspectives. Indeed, given the increasing ease with which documents may be manipulated electronically, do not assume that a form that seems familiar in fact contains the language that you expect.
The Attorney’s Role In A Commercial Real Estate Purchase
When you are purchasing commercial real estate, your attorney plays an invaluable role in protecting your and your business’s interests. Below are a number of tasks you should expect us to complete during the transaction.
Guiding you through the process. Now that you found a commercial property for your business, how do you go about actually buying it? Your attorney will lead you through what to do and when, and advise you on key points throughout. Some of these include reviewing the purchase agreement, assisting in negotiation for the sale, conducting a title search, and closing on the property.
Explaining the tax consequences of a sale or purchase. The purchase of a commercial property has tax consequences. For example, the buyer may have an increased property tax burden, or may be able to deduct interest on financing from personal or corporate income taxes. If the buyer will lease part of the building to another party, income from those activities will also impact the overall tax picture. Your attorney can help you work through the effects and decide how to minimize any adverse impacts. The Seller may be able to reduce taxes by using an installment sale or like kind exchange for other real property.
Discussing your business’s needs and negotiating to fulfill them. Your attorney will help you explore your business’s needs and create a plan to fulfill them in the sale.
- When does your business need to occupy the property?
- Who will pay existing tax and assessment obligations when the property is transferred?
- How will your business pay for the property?
Once your attorney knows the answers to these questions, he can help you negotiate a favorable purchase agreement. If you are an experienced negotiator, he may take an advisory role, but an attorney can also take a more active role as your representative in negotiations.
Drafting or reviewing the purchase agreement. Either party’s attorney can draft the purchase agreement; sometimes it can be advantageous (though more expensive) for your attorney to do so. The purchase agreement is a formal written contract for the sale, and is the most important document in the transaction. It will dictate all the terms of the sale, including contingencies that will allow you to withdraw from the sale if an important event, such as your receiving financing, does not occur. If the other party’s attorney drafts the purchase agreement, your attorney can review it for completeness and accuracy in reflecting the parties’ understanding. He can also explain any terms you are unclear about, and advise you if you should sign the agreement or return to the negotiating table.
Arranging financing and reviewing financing agreements. An attorney can help you make sense of the various financing options available, and the tax and other consequences to you and your business. He should assist you in navigating through the complexities of mortgage lending practices and the documents that will govern your and your lender’s obligations. He can also help you negotiate a better deal with the financing institution and ensure that your understandings are accurately reflected by the contracts.
Reviewing title to the property. A seller can only transfer what he owns; it is therefore important to ascertain exactly what the status of the seller’s title is. In California, a title insurance company will conduct a title search. We will then review the title search results and copies of underlying documents called a preliminary title report, as well as the ultimate policy of Title Insurance.
Even when a title insurance company performs the title search, your attorney should still review it to ensure that the legal description is correct, to help you understand the effect of easements and other restrictions, and to determine whether any conditions exist which may cause difficulties for your operation.
Obtaining a survey of the property if none has been made recently. The legal description of the property may not match an actual survey. For example, the seller may have built a structure or driveway that encroaches on a neighboring property or a neighbor may have done the same to the property you want to buy. If this is so, you may need to decide whether to continue with the purchase, or determine what you need to do to remedy the situation. Your attorney can help you decide whether a survey should be ordered and review the results.
Researching property zoning. Zoning will determine what kind of business you can operate on the property, as well as other restrictions such as the size and location of signage and the amount of parking that you must make available. The title search and previous use of the property do not tell you about the zoning; in fact, an inquiry about the zoning may reveal that the seller was violating a number of provisions. If your business does not comply with zoning, you and your attorney will have to decide whether to go through with the purchase, or whether to seek a variance, conditional use permit, or change in zoning.
Assisting at the closing. Your attorney should be with you at the closing for the property. Documents must be signed and recorded, money must be exchanged, and various provisions such as insurance requirements must be resolved. This process can be confusing, and last-minute disputes may arise. Your attorney should have reviewed all documents at or prior to closing, and should explain them to you and make sure they are properly executed.