What Is a Sale and Purchase Agreement?

A sale and purchase agreement (SPA) is a legally binding contract that engages two parties that obligate a transaction between a buyer and a seller. The document is typically possible for matters regarding real estate; however, these contracts are present in all forms and business areas. The SPA serves as a framework for the negotiation process of the buyer and seller. Aside from real estate deals, it also applies when purchasing large products or quantities, including equipment and vehicle sales. The sale and purchase agreement finalizes the terms and conditions of the acquisition. It is also the conclusion of discussions between the buyer and the seller. The PSA also states the final sales prices of the real estate property within the document. It is also important to realize that these types of agreements are necessary for acquiring another business.

According to the release of the United States Census Bureau and the United States Department of Housing and Urban development issued on June 23, 2021, about the monthly new residential sales for May 2021, the seasonal adjusted annual rate of single-family houses estimates at 769,000 with the median sales price of 374,000 US dollars while the average sales price was 430,000 US dollars.

Components of a Sale and Purchase Agreement

The visible sections of the sale and purchase agreements depend on some provisions of each state. However, it is one of the most necessary documents when it comes to a business owner. In this sense, it is appropriate to have a careful and rigorous process with a legal attorney or expert guiding both parties along the way. To make things easier, take note of the essential components of a purchase and sale agreement below.

Parties of the agreement: In any form of sale or purchase between a buyer and seller, the only entities involved are the two. For instances that a company or a property is being sold as a whole owned by a single person or parent company up for acquisition, a similar concept applies. The only time that there are various parties in a single agreement is when a company contains multiple shareholders. In cases where there are shareholders, each entity must enter into the sale and purchase agreement to sell their shares. Agreement to sell and purchase: A sale and purchase agreement always identifies the items up for selling, including the financial agreement terms. The section also indicates the ownership or assets relating to the property, in addition, the statement of the intended purchase price. The payment method must also be emphasized in the agreement, whether it be cash, credit, or other means. If the buyer prefers to pay through different means aside from immediate cash, the document provides a citation to the appendix. It aids the customer in referencing other payment terms and additional information relating to finance, involving payment schedule and interest rate charges. It must also include any Security and Exchange Commission (SEC) guidelines and other transfer restrictions referring to property and assets. It also discusses purchase price adjustments that refer to statements defining processes relating to changes in costs covering working capital, net debt, and other operational metrics within the term of the purchase and sale agreement. These changes become more prominent when there is a long period between the signing and closing of the deal. Representations and warranties: Both parties provide statements and assurances in the PSA that describe what each party represents. In the seller’s case, they must indicate their ability to sell the property, coupled with the consent to sell and condition. The representations are the statements relating to the ownership, while the warranties are the assurances that provide accuracy and validity. The section follows three essential purposes; one, that there is truth and precision throughout the agreement term. Otherwise, the buyer can delay the closing or termination of the deal. Second, the breach involving breach of the representations and warranties can be the basis for indemnification claims. Lastly, the section supports the due diligence process and the classification of purchase price adjustments. Incorporated statements include the accuracy of the financial statements, existing contracts, condition, and presence of the property, environmental claims or liabilities, asset sufficiency, receivable state of accounts, employee benefits, and related taxes. The seller often seeks to qualify and ascertain various statements or claims. The buyer’s representations and warranties are limited to the ability to complete a purchase. The solvency and investment representations are mandatory for compliance with applicable security laws. The selling party may also seek to limit particular statements or assurances using a ‘knowledge’ qualifier. The qualifier’s purpose is to restrict the truth and accuracy of a description accordingly. It is necessary to only give out particular knowledge to the people that need to have this idea. The information is only limited to the executive officers, shareholders, or the buyer selling the business.Covenants: The use of covenants protects the business and operations, limiting the number of liabilities that the company receives. It regulates the actions that buyers and sellers engage in between the signing and closing. It also informs the basis for closing and indemnification conditions. It means that breaking the covenant implies a breach in closing the deal, and the other party may claim indemnification charges. It may also be a means for calling a termination of the agreement. Covenants fall into three categories: operation of the business, efforts, and financing. Business operations are also referred to as ‘handcuffs’ as they regulate the transactions to ensure the buyer gets the property at a specific expectation. It also allows for cash flow resolutions to accommodate price adjustments in executing provisions. The seller also operates the business with limited access to acquisitions or disposals for the duration of the agreement. It also refrains the seller from particular actions like the termination of employees. An effort covenant commits the buyer and seller to work jointly towards securing administrative approvals between both parties. Through financing statements, the buyer must obtain financing needs, and together with the effort clause, determines the level of commitment for financing.Closing conditions: The closing conditions refer to the provisions that must occur before the obligations made in the PSA. Determining these responsibilities depend on the required consent, like the termination of due diligence. The third-party approvals include shareholders’ approval and change of control provisions found in the operating agreements. It is necessary to limit the scope of consents because the parties can take advantage of situations of obtaining non-material consent to cancel the transaction. Closing conditions are usually unnecessary during private transactions since shareholders are signatories to the agreement. It can also have additional provisions such as labor or tax-related, as needed.Indemnification clause: An indemnification clause implies a payment from a seller to the buyer. It is to compensate for losses acquired because of a breach. These statements also influence other parts of the deal depending on the circumstances of use. Indemnification clauses also include the minimum claim amount, a minimum threshold before reimbursement, and the cap amount. It is also why buyers often ask for a security deposit from the seller to back up any indemnification claims.Termination provisions: Lists down the grounds for situations wherein the parties can terminate the purchase. Either party has the right to eliminate the deal if one or more conditions fail in fulfillment. Defining a termination date is necessary and must reflect in the sale and purchase agreement. There are also termination fees that are within the provisions of the contract. These payments help cover the costs of planning, negotiations, due diligence, and legal and financial advisories incurred in the term of the deal. Restrictive covenants after closing: There are also covenant even after the closing of the agreement. Including these statements and clauses protect the business and the operations after the deal closes. These include the non-solicitation of consumers, employees, and competition. Drafting these provisions is beneficial with legal aid and a practicing attorney to ensure they are enforceable.Boilerplate language: The section addresses legal aspects relating to the agreement, including governing laws, statements indicating the document represents the two parties, modifications, and handling of legal documents, lawsuits, and expenses. Signatures: Finally, the agreement is not valid unless it is signed. The PSA must hold both parties’ signatures at a specific section. Notarizing helps with the legitimacy of the document; however, it is not necessary.

How to Draft a Purchase and Sale Agreement

Creating a purchase and sale agreement must be well-written and comprehensive. It must identify the essential components as well as make them coherent and easily understandable. To help you in drafting the document, here are helpful steps to compose a purchase and sale agreement.

Step 1: Start With the Basics of the Deal

Indicate the basics of the deal, the parties, and the details of the property. List the full names of the buyer and seller and the complete address of the business. The agreement must also contain all items in the sale, including fixtures, furniture, and other equipment. The idea is to include all necessary objects and information that makes for a clear explanation of the exact details in purchasing.

Step 2: Indicate Essential Prices, Dates, and Fees

The SPA must include the price of the business, including the date of the turnover and the person paying for the legal fees. Along with the purchase price, it must state the payment terms that specify when the buyer pays and in what increments. The date of sale must list the final date of closing for the buyer and seller and the following fees. It must also include which of the two parties pays for associated payments and what they are for.

Step 3: Identify Agreements and Obligations

Non-solicitation and non-compete agreements┬ámust reflect in the agreement. These clauses serve a vital role in the relationship between the buyer and seller. It restricts the seller from competing with the seller’s business of a similar nature and recruiting employees from the buyer’s property. The seller must also state the transfer of all legal paperwork to the buyer at a given date for a seamless transition.

Step 4: List Down Possible Contingencies

Identify potential loopholes and limitations that permit the termination of the agreement. If one party or the other does not satisfy their obligations, there must be a penalty they must serve. Any rules of these punishments must be clear and impartial to the seller and the buyer.

Step 5: Detail the Staff

The staff must have a continuing contract that states their services remain lasting even if there is a business transfer. The names of the staff members must reflect on the agreement along with the specifics of their compensation and an explanation of who shoulders to pay for the wages once a transfer is complete. Meanwhile, the staff that does not wish to continue employment must be on a list along with a termination date.

Step 6: Prove the Ability to Sell or Purchase

The seller must present evidence that they have the right to sell the property and a statement containing the intention of sale. On the other hand, the buyer must list any assets or financial means to guarantee they can cover all expenses. If either party has any unsettled debts or financial obligations, there is a possibility that the agreement cannot push forward. Guarantee that there is a fulfillment of all unpaid fees before engaging in the sale and purchase agreement.

FAQs

How does a sale and purchase agreement work?

The SPA is different from a sales agreement or a purchase agreement. Rather than completing a given transaction, it facilitates the sale by providing clear guidelines for each party’s responsibilities. Signing the contract does not guarantee the selling or buying of a property. Instead, it determines how the parties handle title searches and transferability, inspections, negotiations, financing and loan documentation, money transfers, closing, and associated costs. The documentation is critical as it provides a basis for the property’s sale and demonstrates the willingness and effort of both parties to engage in the agreement with knowing the financial consequences.

What are the types of sale and purchase agreements?

There are two commonly used sale and purchase agreements, and they are house and car agreements. Essentially, the two share many similar components and some vital differences. For house sale and purchase, it addresses specific needs and provisions of the deal. Namely, it considers escrow agreements, closing and uses real estate terminology throughout. On the other hand, the car sale and purchase agreement describes concerns related to the transfer of ownership. They are also shorter and contain fewer terms and conditions in comparison to the house SPAs.

How do sale and purchase agreements differ from a bill of sale?

A sale and purchase agreement details the terms and conditions of selling or buying a property that both parties agree to. Meanwhile, a bill of sale is a document that serves as evidence where the transfer of property ownership is official from the seller to the buyer. That means the bill of sale only occurs once a final transaction has been made.

There are plenty of ways that a buyer and seller can settle on terms regarding property purchase. However, there are methods wherein legal boundaries, provisions, and other conditions are necessary for a clear and smooth transaction between the parties. It is why sale and purchase agreements are essential when it comes to real estate transactions. It details all descriptions and explanations thoroughly and comprehensively to assure the parties of each other’s capability to commit to the purchase. In the words of Amit Kalantri, “Preparation doesn’t assure victory, it assures confidence.”. Prepare to engage in purchasing property through using the sale and purchase agreement samples above, ready for download and use.