Purchase-Contract Considerations

Your contract might include other important issues such as how the deposit is handled and financing contingency options. It might address whether the facility is being sold with room for expansion, the use of 1031 exchange as part of the acquisition, or whether you’re buying the facility based on pro forma versus historical financials.

In addition to essential deal points, consider what representations (reps) and warranties you will request from the seller. These are formal statements referring to past or present facts or matters essential to the contract. Your agreement may also provide that if the statements are wrong, you have certain remedies, such as the right to a partial return of the purchase price.

The idea is for you to identify the critical facts, circumstances and assumptions on which you rely when deciding to enter the contract. The reps and warranties section of the contract requires the seller to expressly state certain facts or matters and stand behind them—or pay the price for breaching them.

Many state-approved commercial real estate forms contain a standard set of reps and warranties. But don’t hesitate to add whatever you feel is necessary. Here are some items to consider:

• The seller has full power and authority to execute the sales agreement and carry out the transactions contemplated by it.
• The seller has promptly prepared and filed all federal, state and local tax returns and reports as are and have been required to be filed, and all taxes shown thereon to be due have been paid in full, including but not limited to, sales tax, withholding tax and all other taxes of every nature.
• The seller has good and merchantable title to all of the business’ properties and assets.
• At closing, such properties and assets will be subject to no mortgage, pledge, lien, conditional sales agreement, security agreement, encumbrance or charge, secured or unsecured, except for those taxes which shall be pro-rated as of the date of closing.
• The seller represents that all items provided in the due-diligence list are correct to the best of his knowledge.
• The seller represents and warrants that all revenue-generating activities are approved under the current zoning regulations for the property.
• The seller is not aware of any new competition coming into the market (within a 5-mile radius) other than what is listed as an attachment.
• The seller has no knowledge of pending or proposed zoning changes other than what is listed as an attachment.
• The seller has no knowledge of future road changes, condemnations or easements that may affect the property other than what is listed as an attachment.
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