What is a Choice of Law Provision in a Commercial Real Estate Purchase Agreement and Why is it Important?
Although it may appear to be boilerplate language, the choice of law clause plays a practical role in shaping how a purchase agreement is interpreted and enforced. For both buyers and sellers, identifying the governing law in advance can reduce procedural complications and support a more predictable path for resolving legal issues, should they arise.
Why Include a Choice of Law Provision in a Real Estate Purchase Agreement?
1. Predictability and Certainty
By selecting a governing legal framework in advance, the parties can avoid ambiguity if a dispute arises. Without a choice of law clause, courts are tasked with conducting a conflicts of law analysis, which considers various factors such as the location of the property, where the contract was executed, and where the parties are based. This analysis can be time-consuming and lead to uncertain outcomes. Including a governing law provision eliminates this step and offers greater predictability for both parties.
2. Addressing Differences in State Laws
Real estate law is primarily governed at the state level, and laws vary between states. These differences can affect core aspects of the purchase agreement, such as remedies for breach, and interpretations of specific terms. The enforceability of particular provisions can be influenced by the selected governing law. Contract terms—such as indemnification clauses, default remedies, or liquidated damages—can be treated differently depending on the state law chosen. A well-drafted choice of law clause helps ensure that the parties’ expectations about enforceability align with the legal standards that will apply.
3. Distinction from Forum and Venue Selection
The choice of law clause determines which jurisdiction’s laws apply; the forum clause identifies which court system will hear the case; and the venue clause specifies the physical location where the case will be adjudicated. While these clauses are often included in the same section of a purchase agreement, they serve different purposes.
Conclusion
Including a choice of law provision in a commercial real estate purchase agreement allows the parties to proactively identify the legal rules that will govern their transaction. By reducing uncertainty and avoiding procedural hurdles, the clause supports a more predictable framework for resolving disputes and enforcing the parties’ expectations. For transactions involving multiple jurisdictions, this clause merits thoughtful consideration and careful drafting.
