Real Property Law
Five Key Distinctions between AIR and CAR with respect to Commercial Property Purchase Agreements.
When representing clients in real estate transactions in California, real estate attorneys regularly come across many different types of purchase and sale agreements, including standardized contracts published by certain organizations.
Often, when commercial property is involved, the parties may be utilizing an AIR Commercial Real Estate (“AIR CRE”) purchase agreement. When a transaction involves the sale of residential property, the parties may be utilizing a California Association of Realtors (“CAR”) purchase agreement. In addition to its residential real estate contracts, CAR also provides contracts for the sale of commercial property.
This article will focus on the sale of commercial real estate and highlight some key distinctions between the often used AIR CRE Standard Offer, Agreement And Escrow Instructions For Purchase of Real Estate (Non-Residential) (referred to as “AIR Agreement”) and the CAR Commercial Property Purchase Agreement And Joint Escrow Instructions (NON-RESIDENTIAL) (referred to as “CAR Agreement”). Although provisions in these agreements may be modified through strike outs and addendums, the following discussion is based on the default provisions of both agreements.
I. Contingency Removal: Passive v. Active
It is important to review each purchase agreement for the specific language it contains with respect to removal of contingencies because buyer’s deposit usually becomes non-refundable after buyer’s contingencies are removed or waived. Contingency removals can be passive or active depending on the language in the purchase agreement.
In the AIR Agreement, the removal of the financing contingency and the physical inspection contingency are passive, meaning that if the buyer fails to notify the parties that it is not removing its contingencies it is presumed that the contingencies have been waived.
With respect to the financing contingency, Paragraph 5.2 of the AIR Agreement states that: “If Buyer shall fail to notify its Broker, Escrow Holder and Seller … in writing… that the New Loan has not been obtained, it shall be conclusively be presumed that Buyer has either obtained said New Loan or has waived this …contingency.”
Similarly, Paragraph 9.1 of the AIR Agreement states that: “If Buyer fails to notify Escrow Holder in writing, of the disapproval of any of said contingencies within the time specified therein, it shall be conclusively presumed that buyer has approved such item, matter or document.”
If a buyer does not intend to remove its contingencies and misses the deadline to inform the relevant parties, it may unintentionally waive its contingencies and the deposit may become nonrefundable. Therefore, it is essential that attorneys and brokers representing buyers pay very close attention to the language in the AIR Agreement with respect to contingency removals and closely track contingency expiration dates.
In the CAR Agreement, generally the removal of most contingencies must be active and in writing, reducing the risk that a buyer inadvertently waives its contingencies.
Specifically, Paragraph 18 of the CAR Agreement provides that: “Any removal of contingencies or cancellation under this paragraph by either Buyer or Seller must be exercised in good faith and in writing.” If the buyer fails to actively remove or waive contingencies by the time specified in the CAR Agreement, the seller will generally need to deliver a Notice to Buyer to Perform before it can cancel the agreement.
As a result, the CAR Agreement provides greater protection for buyers as it relates to contingency removals and reduces the risk that a buyer may lose its deposit.
II. Close of Escrow
The close of escrow is another important part of every purchase agreement and both the AIR Agreement and the CAR Agreement contain different language for closing of escrow. It is essential that the parties involved fully understand the nuances related to the close of escrow date.
In the AIR Agreement, the closing date is tied to removal of buyer’s contingencies. Paragraph 1.1 of the AIR Agreement provides that: “… (“Escrow”) … to close 30 or ____ days after the waiver or expiration of Buyer’s Contingencies (“Expected Closing Date”).” An attorney representing a seller should ensure that if the seller grants an extension of buyer’s contingencies but does not intend for the closing date to be extended, it specifically includes language stating that the closing date shall remain unchanged.
In the CAR Agreement, Paragraph 1. D. provides that: “Close of Escrow shall occur on [ ] (date) (or ___ Days After Acceptance).” Since the close of escrow in the CAR Agreement is tied to the date of acceptance, it is important to note that extending buyer’s contingencies will not automatically extend the closing date. Therefore, attorneys representing buyers should ensure that, if needed, the closing date is adjusted accordingly when buyer’s contingencies are extended.
III. Dispute Resolution
The AIR Agreement and the CAR Agreement also provide different methods for resolving disputes.
The AIR Agreement does not require mandatory mediation of contractual disputes. However, it does provide for mandatory arbitration only with respect to disputes about the deposit.
Paragraph 22.1 of the AIR Agreement provides that: “Any controversy as to whether seller is entitled to the liquidated damages and/ or buyer is entitled to the return of the deposit money, shall be determined by binding arbitration…” Further, Paragraph 22.2 of the AIR Agreement provides that: “Buyer’s resort to or participation in such arbitration proceedings shall not bar suit in a court of competent jurisdiction by the buyer for damages and/ or specific performance unless and until the arbitration results in an award to the seller of liquidated damages, in which event such award shall act as a bar against any action by buyer for damages and/ or specific performance.”
As a result, the buyer may still pursue damages and / or specific performance in a court proceeding unless the seller is awarded liquidated damages in arbitration under Paragraph 22.1.
The AIR Agreement provides for arbitration under the commercial rules of the American Arbitration Association and requires that each arbitrator shall be an impartial real estate broker with at least 5 years of full time experience in both the area where the property is located, and the type of real estate involved. It is important to note that AIR Agreement does not require that the arbitrator be an attorney.
Unlike the AIR Agreement, the CAR Agreement requires that buyer and seller agree to mediate any dispute or claim arising out of the agreement (with some specified exclusions) before resorting to arbitration or court action. The mediation must be through the C.A.R. Consumer Mediation Center or other service mutually agreed to by the parties.
There is strong incentive for the parties to comply with the mediation requirement because a party that fails to do so may lose its right to recover attorney fees even if it ultimately prevails in the dispute. In a situation like this, Paragraph 26 B. of the CAR Agreement provides that: “… then that Party shall not be entitled to recover attorney fees, even if they would otherwise be available to that Party in any such action.”
Unlike the AIR Agreement, the CAR Agreement requires that the arbitrator be an attorney, unless the parties choose otherwise. This language is contained in Paragraph 26. B of the CAR Agreement which provides that: “The arbitrator shall be a retired judge, or justice, or an attorney with at least 5 years of transactional real estate Law experience, unless the parties mutually agree to a different arbitrator.”
IV. Right to Assign
The right to assign provisions are also important in commercial real estate transactions and warrant close attention because a buyer may wish to assign the agreement to an entity that is controlled by buyer or to a third party. The AIR Agreement and the CAR Agreement are slightly different in how they handle assignments.
The AIR Agreement does not require seller consent for buyer to assign its rights under the agreement. Paragraph 1.1. of the AIR Agreement provides that: “Buyer shall have the right to assign Buyer’s rights hereunder, but any such assignment shall not relieve Buyer of Buyer’s obligations herein unless Seller expressly releases Buyer.” Thus, the buyer can freely assign the agreement to any party, whether or not the assignee is controlled by buyer or a third party.
On the other hand, the CAR Agreement requires seller consent for any assignment of buyer’s interest in the agreement. Paragraph 30 of CAR Agreement provides that: “Buyer shall not assign all or any part of Buyer’s interest in this Agreement without first having obtained the written consent of Seller. Such consent shall not be unreasonably withheld unless otherwise agreed in writing.”
Although the CAR Agreement requires seller consent to assign, it does have a requirement that such consent shall not be unreasonably withheld. However, despite this reasonableness language in the CAR Agreement, the AIR Agreement offers much more flexibility for buyers to freely assign the agreement.
Like the AIR Agreement, the CAR Agreement also takes the default position that an assignment will not relieve buyer of its obligations under the agreement.
V. Estoppel Certificates
Estoppel certificates are a critical part of most commercial real estate transactions because they are a legally binding document whereby a tenant represents or promises certain things regarding its lease or rental agreement to be true. The topics normally recited in an estoppel certificate relate to the tenant’s relationship with the landlord and the status, as of the date of the certificate, regarding certain terms of the lease. The AIR Agreement and CAR Agreement are also different with respect to estoppel certificates.
By default, the AIR Agreement requires seller to provide buyer with estoppel certificates. Paragraph 9.1(h) of the AIR Agreement provides that: “Seller shall … provide…Buyer…with a tenancy statement (“Estoppel Certificate”) … executed by Seller and/ or each tenant…Seller shall use its best efforts to have each tenant complete and execute an Estoppel Certificate for that tenancy.”
On the other hand, the CAR Agreement has no default estoppel certificate clause and requires a specific box to be checked in order for the seller to be obligated to deliver estoppel certificates. If checked, Paragraph 11 B (3) of the CAR Agreement provides that seller shall deliver “Tenant estoppel certificates …completed by Seller or Seller’s agent, and signed by tenants…” If a buyer requires estoppel certificates it is crucial that that the attorney and broker representing a buyer ensure that the appropriate box is checked on the CAR Agreement.
Both the AIR Agreement and CAR Agreement offer some advantages, including but not limited to broader familiarity with the contract terms and speedier contract review. However, despite their routine usage for commercial real estate transactions, the key distinctions between the AIR Agreement and CAR Agreement should be carefully considered by attorneys and their clients.
Shawn S. Dhillon, Esq. is in-house Corporate Counsel for a Construction and Real Estate Development Company in Northern California.