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Breaking Down a Typical Commercial Real Estate Purchase and Sale Transaction

By Justin Borrowdale, Diepenbrock, Elkin Gleason LLP

While no two transactions are the same, many commercial real estate purchases (or sales, depending on which side of the transaction you are on) follow a similar structure. While clients are sometimes hesitant to involve their attorney as the transaction process is developing, early involvement typically makes representation, and the entire transaction, go more smoothly for the client. Clients are understandably hesitant to involve lawyers because we can be expensive and clients often think that they can handle the early negotiations on their own. However, real estate transactions often build on themselves. Although they become more complex as the transaction develops, they are largely dependent on earlier negotiations. Therefore, as an attorney representing either the buyer or the seller, it is important to be involved from the beginning. Such early involvement will not only allow you to more effectively represent your client, but will allow you to better ensure that no issues are missed along the way. Typically, an attorney involved from the beginning can expect to guide his or her client through drafting a letter of intent (sometimes also called a term sheet or memorandum of understanding), followed by negotiating and drafting a purchase and sale agreement, engaging in due diligence, then title review and obtaining property insurance, and finally closing escrow.


After initial interest and perhaps a few informal discussions regarding the property, a letter of intent (“LOI”) is usually agreed upon. An LOI is generally a non-binding starting point for the basic deal terms. Essentially, the parties use this brief document to infer the other party’s position and see if they are close enough on the basic deal terms to engage in the expenditure of time and money necessary to move forward with the transaction. If the parties are too far apart on basic terms such as price, it is often not worth proceeding with the deal.

It is important, even at this early stage to think about your client’s interests and how to protect them. For example, if you are representing the seller, your client may want their asking price to remain confidential. If representing the buyer, your client may want the seller to refrain from negotiating with other potential buyers. For these reasons, many LOIs include limited binding provisions such as non-disclosure or confidentiality and exclusivity terms.

Additionally, the complete purchase and sale agreement will be based on the LOI. As the starting point for the entire transaction, you should strive to be involved in drafting the LOI, if financially and practically feasible. This will allow you to be better informed and provide helpful guidance to your client from the beginning.

If the parties can agree on the essential terms addressed in the LOI, then they can proceed to negotiating and drafting a full purchase and sale agreement.


The purchase and sale agreement (“PSA”) is the most important document in a real estate transaction. It governs nearly every detail of the transaction:

  • How the money and necessary documents change hands between the buyer and seller;
  • The timeline the buyer has to inspect the seller’s documents and property;
  • The representations and warranties the parties make to each other;
  • The covenants the parties agree to perform;
  • The timeline and procedure for closing the transaction;
  • Provisions in case of default;
  • Other general provisions; and
  • Any other miscellaneous issues that the parties want to address.

While the bulk of the purchase price and the closing documents are exchanged at closing through an escrow agent, some portion of the purchase price—or earnest money—may be paid at the outset of the transaction as a deposit. Throughout the transaction, some or all of this deposit may be refundable to the buyer if certain acts are not performed or target dates are not met. Conversely, if the buyer does not perform as required, part or all of this deposit may be forfeited and the seller allowed to rescind the PSA. Additionally, the seller will likely have to disclose all the relevant or “due diligence” documents concerning the property to the buyer for the buyer’s review before the buyer will commit to purchasing the property. This process is discussed further below.

Because some issues are only known to the seller and are not easily disclosed in other ways, buyers often want the seller to make certain representations concerning the property. For example, sellers often represent that the documents they delivered are true and correct; that the seller, the property, and its use is in compliance with all laws, statutes, and ordinances; and that there is no pending action, litigation, or investigation concerning the seller or the property.

Next, buyers may want some assurance that the seller will perform certain tasks such as continued operation of the property (if the property is leased) or that all owners or tenants have vacated the property, if the buyer intends to occupy the property. Buyer may also ask the seller to indemnify the buyer against claims that occurred or accrued during the seller’s ownership of the property. The extent and nature of the indemnification may be a highly contested issue.

The PSA’s closing section generally covers what documents need to be delivered to the escrow agent, how the remaining amount of the purchase price is delivered, and how the costs are allocated between the parties. The closing process is also discussed in greater detail below.

The general provisions are often dismissed as “boilerplate.” However, issues such as governing law, whether “days” means calendar or business days, and how to address issues that arise when important days fall on holidays or weekends are often dealt with in this boilerplate. While they may not seem important during the negotiation of the PSA, during the contract period, these provisions may be vitally important.

Finally, there are myriad other issues that the parties may wish to address in the PSA, including: rights of first refusal on other pieces of property owned by the seller, the transfer of existing lease agreements and personal property, and whether the seller will make improvements to the property before it is acceptable to buyer.


The due diligence process is used to inform the buyer of the condition of the property and any structures located thereon, and alert him or her to potential issues that may arise as the property’s new owner. The diligence process certainly varies from transaction to transaction. This is in part due to the unique nature of each property, clients’ varying objectives, and differing lender requirements. The PSA will typically require that the seller provide the buyer with copies of any and all documents that are material to the property, including, but not limited to, existing leases, operating statements, any prior Phase I reports, ALTA surveys, and any applicable warranties. In addition to reviewing the documentation provided by seller, buyer will most likely perform an independent investigation of the property. The buyer will generally obtain an environmental site assessment (commonly called a “Phase 1”) to determine if there are any potential environmental issues at the property—such as chemical storage or underground fuel tanks. The buyer will also typically hire a third party to perform a physical inspection of the property, which will include an evaluation of the building interior systems, including HVAC, and may flag ADA compliance issues.  The buyer may also want to have the property surveyed.  Obtaining an ALTA survey will enable the buyer to acquire an ALTA title insurance policy (as opposed to a CLTA policy), and help the buyer identify encroachments, easements, and other issues. The buyer should also consider obtaining a zoning letter from the local municipality in order to ensure that the buyer’s intended use of the property is permitted, and to confirm that there are no building code violations. The lender will also require an appraisal.

This process is highly transaction-dependent and varies greatly. Even when these standard tasks are completed, they will often raise additional issues which require follow-up. You will often work with third-parties as well, who likely do not have the same urgency you and your client possess. It is therefore important to start this process as soon as feasible, in order to complete the necessary due diligence in a timely manner.


Title insurance insures the buyer against any title claims to the property, except those listed as exceptions in the policy. As the attorney for the buyer, title review necessitates:

  • Discovering the current state of title;
  • Resolving as many issues as possible;
  • Determining which risks are acceptable for your client;
  • Determining the risks to your client if you client should elect to continue with the transaction; and
  • Deciding what endorsements are desirable.

The process of obtaining title insurance is generally as follows. The title company will deliver a “preliminary report,” which discusses the proposed coverage and any exceptions. It is critical to ensure that the basic information in “Schedule A”— the legal description, and the class=”anchor” name of the fee owner—is accurate.

Schedule B contains the exceptions to coverage. It will contain general exceptions, such as matters disclosed by survey and other rights not shown by public records. These can often be deleted if the seller provides an appropriate “owner’s affidavit” to the insurer.

There are also site specific exceptions to coverage. These generally pertain to recorded documents such as easements, taxes, and other encumbrances on the property. These should be analyzed carefully, as many exceptions can be deleted for one reason or another. The attorney should first look to see if these encumbrances have expired or do not apply to the property for some other reason. If there is a reason an encumbrance could be removed, the attorney should work with the title officer to do so. During the title review period, the attorney may need to obtain a release from a satisfied lienholder, an estoppel from a declarant under some CC&Rs or an approval of an architectural review committee. If the exceptions are not removable, the attorney and client must discuss the acceptability of each encumbrance, which may impose costs, limit the client’s use of the property, or interfere with current or contemplated improvements. The reviewing attorney should also consider whether any of the underlying documents associated with an exception give the buyer insurable rights, which can be added to Schedule A.

The buyer’s attorney must also consider whether any title endorsements are necessary. These specific additions to the title policy can alleviate a buyer of specific concerns regarding the property. These endorsements vary widely to cover the myriad situations that arise in a real estate transaction. For example, ALTA Endorsement 9.2-06 covers violations of covenants conditions and restrictions (“CC&Rs”) and ALTA Endorsement 28-06 covers encroachments on the property.

Finally, it is also important to consider third parties when negotiating the exceptions and endorsements. Lenders may have their own requirements, which must be considered if financing is to be obtained. Additionally, the client may wish to consider potential future purchasers, who may not have the same plans or expectations as the client.


In the PSA, the buyer and seller will have agreed to deliver certain items into escrow. The seller will typically deliver executed deeds, assignments, affidavits, and other documents. Typically, the buyer will deliver the purchase price, along with the necessary loan documents—which include the deed of trust and promissory note—as well as executed copies of any assignments that accompany the purchase and sale. The release of the purchase price to the seller is conditioned on the receipt of the seller’s documents and vice versa. In this way, the escrow agent acts as the go-between for the buyer and seller.

Escrow instructions govern the closing process, and generally tell the escrow agent exactly what the seller should be delivering and exactly what the buyer should be delivering. Generally, in commercial transactions, the buyer’s attorney will prepare the escrow instructions. This is often heavily influenced by the PSA. It will also state what other conditions are necessary for closing, such as the title company’s issuance of a title policy for the property and buyer’s receipt of loan funding. Finally, it will include instructions for recording, dispersing funds, providing copies to the parties, as well as providing notification that escrow has closed.

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