In a prior article, I addressed the issue of Should You Use the AIR Purchase And Sale Agreement? Some sellers believe that the AIR purchase agreement does not contain protections afforded sellers in custom agreements.
It is correct that a custom agreement drafted by a seller’s attorney will typically favor Seller more than the AIR purchase agreement. Nevertheless, to make the AIR purchase agreement more favorable to Seller, Seller can modify the AIR purchase agreement to include some of the provisions found in many custom agreements. The AIR Commercial Real Estate Association has of course designed its forms to allow modifications.
Here are some changes that sellers sometimes make to the AIR purchase agreement:
1. Property Information Sheet: Paragraph 9.1(a) of the AIR purchase agreement requires Seller to complete the “Property Information Sheet,” which is an AIR form. The Property Information Sheet requires Seller to disclose information relating to 15 different aspects of the Property (such as material physical defects, soils condition, hazardous substances, and unrecorded title conditions), or to state that it has nothing to disclose regarding the various items. Sellers often do not wish to complete the Property Information Sheet, because they believe that doing so exposes them to potential liability. By providing information relating to virtually every aspect of the property (or stating that they do not have any information to disclose about various aspects), some believe it increases the likelihood of Buyer suing Seller after the Closing. Buyers may be more likely to claim that Seller knew of a defect and did not disclose it, or did not properly disclose it. In custom agreements, there is no Property Information Sheet requirement.
Tip: If Seller has such a concern it can modify Paragraph 9.1(a) as follows: it can keep the language in Paragraph 9.1(a) that Seller will make the disclosures required by applicable law, but delete the requirement to provide the Property Information Sheet.
2. Invasive Testing Standard: Paragraph 14 of the AIR purchase agreement allows Buyer to perform invasive testing during the due diligence period, subject to Seller’s reasonable discretion. During the due diligence period, Buyers may want to perform invasive testing to assess the environmental condition of the Property, to assess seismic issues, or for a variety of other reasons. Sellers are frequently sensitive about the scope of any invasive testing and often change the standard to a sole discretion standard. Accordingly, Buyer would not be able to perform invasive testing without Seller’s approval, which Seller may withhold in its sole discretion.
Tip: If the parties know before opening escrow that invasive testing will be required, one approach is to negotiate the scope of the invasive testing while negotiating the AIR purchase agreement. In that way, Buyer is protected from a situation in which it spends time and money to perform investigations only to find out that Seller will not approve testing that Buyer (or its lender) believes is necessary. And Seller is protected in that the invasive testing will be limited to a scope Seller is comfortable with.
3. Due Diligence Period: Paragraph 9.1 of the AIR purchase agreement describes a number of inspections which Buyer may undertake. The AIR purchase agreement provides that Buyer has 10-30 days to waive various inspection contingencies. Many sellers (and buyers) prefer to modify the AIR purchase agreement so that there is just one deadline by which Buyer must decide whether it is proceeding with the purchase (in which case Buyer’s deposit becomes non-refundable) or terminating the transaction.
4. Waiver of Contingencies: Paragraph 9.3 of the AIR purchase agreement addresses the situation in which Buyer disapproves of a Buyer Contingency. In such a situation, the Agreement and Escrow do not terminate. Instead, Seller has 10 days to commit to curing Buyer’s disapproval. If Seller does not commit to curing the disapproval, Buyer has 10 days to terminate. Many sellers prefer that at the expiration of the due diligence period, Buyer is required to make its final decision whether to proceed. Therefore, sellers frequently modify the AIR purchase agreement so that Buyer must send a termination notice before the end of the due diligence period if it wishes to terminate. If it does not send the termination notice, Buyer is deemed to have waived its contingencies, the Deposit becomes non-refundable, and Buyer is committed to purchasing the Property.
Tip: According to this approach, if Buyer has discovered an issue about which it is concerned, it should discuss this issue with Seller prior to the expiration of the due diligence period and attempt to agree on a resolution/cure from Seller (including a potential reduction in the Purchase Price) prior to the expiration of the due diligence period.
In Part 2, I will suggest additional Seller modifications.
What do you think of these modifications? Post your comments or questions below.