The Importance of the Property Description in a Commercial Real Estate Purchase and Sale Agreement

One of the most critical—and often underestimated—aspects of a well drafted commercial purchase and sale agreement (PSA) is the property description. Far beyond simply outlining the parcel of land, a comprehensive property description serves as the blueprint for what exactly is being bought and sold. In commercial transactions, this can include a myriad of assets and rights that extend well beyond the physical boundaries of the real estate itself. Failure to accurately and thoroughly describe the property can lead to costly disputes, unanticipated liabilities, and even the breakdown of a transaction that both parties have worked hard to negotiate.

In this post, we explore why the property description in a PSA is so essential, break down the many components that might be included, and offer guidance on how buyers and sellers alike can ensure they capture all the necessary elements early in the process.

Understanding the Complexity of Commercial Property Sales

Many parties initially assume that a commercial real estate transaction involves a simple transfer of a piece of land with a building on it. However, commercial transactions are rarely so straightforward. Instead, a typical commercial property sale can encompass several layers of tangible and intangible assets, rights, and contractual obligations. Below, we detail the primary elements that may need to be described in a commercial PSA:

1. The Land Itself

At the most fundamental level, the land on which the property is built forms the basis of any commercial real estate transaction. This includes not only the surface area but also any subsurface rights that may be of value or concern.  It is important that the land be identified not only by an address, but by a legal description precisely describing the real estate that is being transferred.

2. Associated Rights, Easements, and Licenses

Commercial properties often come with a host of associated rights that can either benefit or burden the property. These might include:

• Easements: Rights of way or access granted to neighbors or utility companies.
• Licenses: Permissions that might allow or restrict certain uses of the property.
• Other Rights: Any additional encumbrances or benefits that affect the use and value of the land.

3. Improvements and Physical Structures

The physical components of the property include more than just the primary building. This category can encompass:

• The Subject Building: The main structure that is the focus of the transaction.
• Outbuildings: Any additional structures, such as garages, sheds, or storage units.
• Hardscaping and Landscaping: Features such as driveways, sidewalks, parking areas, fencing, and roadways.
• Infrastructure: Associated mechanical, electrical, and plumbing systems that support the operation of the property.

4. Contract Rights Related to Property Operations

A commercial property is rarely just a static asset—it is often an income-producing venture with multiple contractual relationships, including:

• Leases and Occupancy Agreements: Contracts where tenants pay rent to occupy parts of the property.
• Service Agreements: Contracts with vendors responsible for property maintenance and operations, such as:
  • Snowplowing
  • Janitorial services
  • Landscaping
  • Elevator and HVAC maintenance
  • Maintenance agreements for other building systems

5. Tangible “Personal” Property

While the real estate component of the transaction is paramount, many commercial deals also involve tangible personal property that the seller owns. This can include:

• Office Equipment and Furniture: Items used in on-site leasing offices.
• Maintenance Tools and Vehicles: Equipment kept on site to maintain the property.
• Other Movable Assets: Gym or pool equipment, marketing collateral, and other items that can be physically moved.

6. Intangible Personal Property

Intangible assets are sometimes overlooked but can be of significant value. These might consist of:

• Transferable Warranties: Benefits or protections that may require a fee for transfer.
• Plans and Permits: Documentation that can affect future development or operations.
• Development Rights: Pre-obtained rights that allow for further enhancements or modifications to the property.
• Branding Elements: Trade names, dedicated websites, phone numbers, or marketing materials that are associated with the property’s reputation and market presence.

7. Additional Complex Elements for Specialized Properties

In certain sectors, particularly hospitality or other management-intensive industries, the property description may need to address even more nuanced elements:

• Dedicated Employees and Operational Inventory: Staff, room reservations, and inventory that are part of the day-to-day operations.
• Prepaid Services or Gift Cards: Customer-facing elements that directly tie into revenue streams and operational continuity.

Why a Detailed Property Description Matters

An imprecise or incomplete property description can have far-reaching consequences. Here are some key reasons why careful attention to the property description is so important:

Avoiding Surprises at Closing

Imagine finalizing a transaction only to discover that an asset you assumed was part of the deal is, in fact, excluded. This misalignment can lead to disputes, delays, and potential litigation. By defining exactly what is included—and, equally important, what is excluded—both parties reduce the risk of unpleasant surprises when it comes time to transfer ownership.

Ensuring Comprehensive Due Diligence

A detailed property description provides the buyer with a clear checklist for due diligence. When buyers know exactly what assets, rights, and obligations they are acquiring, they can:

• Perform Thorough Inspections: Validate the condition and existence of physical assets.
• Review Contractual Obligations: Scrutinize leases, service agreements, and other contractual commitments to assess ongoing liabilities and benefits.
• Evaluate Tangible and Intangible Assets: Ensure that all elements, from office furniture to brand names, meet their expectations and are in good order.

Facilitating a Smooth Closing Process

The closing process for a commercial real estate transaction involves a variety of legal instruments and agreements. These may include:

• Deeds: For transferring real estate.
• Bills of Sale: For transferring personal property.
• Assignment and Assumption Agreements: For transferring contractual rights and obligations. Having a clear, upfront property description helps ensure that all these instruments accurately reflect the transaction, minimizing the risk of errors or omissions that could derail the closing.

Avoiding Post-Closing Disputes

Ambiguity in the PSA’s property description can lead to disputes after closing. Whether it’s a disagreement over whether a particular asset was included in the sale or a misunderstanding about contractual obligations, these conflicts can result in costly litigation and sour business relationships. By detailing every component of the transaction at the outset, both parties can enter closing with a clear, mutual understanding.

Strategies for Drafting an Effective Property Description

Given the complexities outlined above, what steps can both buyers and sellers take to ensure that the property description in their PSA is comprehensive and clear?

Early and Collaborative Negotiations

• Engage Legal Counsel Early: Experienced commercial real estate attorneys can help both parties identify all the elements that need to be included. They can also provide templates and examples from similar transactions.
• Hold Detailed Discussions: Encourage open dialogue between buyer and seller to identify every asset, right, and obligation. This might involve multiple rounds of review and revision before the PSA is finalized.

Conduct a Thorough Inventory

• Physical Inventory: Create a detailed list of all tangible assets, including outbuildings, landscaping features, and equipment.
• Contractual Review: Examine all existing leases, service agreements, and vendor contracts to determine which rights and obligations will transfer with the property.
• Intangible Assets Review: Don’t overlook branding elements, permits, development rights, and other non-physical assets that can add significant value to the property.

Define Exclusions Clearly

• Document What’s Not Included: Just as important as listing what is included is clearly stating what is excluded from the transaction. This prevents future misunderstandings and provides a clear boundary for the transfer.
• Use Specific Language: Avoid ambiguous terms that could be interpreted in multiple ways. Precision in language is essential in preventing disputes.

Coordinate the Closing Documents

• Align All Instruments: Ensure that the deed, bill of sale, assignment agreements, and any other relevant documents reflect the comprehensive property description. Inconsistencies between these documents can lead to legal complications down the line.
• Pre-Closing Review: Conduct a final review of all documents prior to closing to confirm that every element of the transaction has been accurately and thoroughly documented.

Conclusion

A well-drafted property description is far more than a mere formality in a commercial real estate Purchase and Sale Agreement. By thoroughly identifying and detailing every component of the property, from the land and physical structures to the intangible assets and contractual rights, buyers and sellers can mitigate risks, ensure comprehensive due diligence, and pave the way for a smooth closing process.

Early collaboration, meticulous documentation, and the guidance of experienced legal counsel are essential in crafting a property description that meets the needs of all parties involved. Whether you’re a buyer keen on avoiding unexpected liabilities or a seller looking to clearly delineate what is being transferred, investing time and resources into this aspect of the PSA is indispensable.

By keeping these considerations in mind, both parties can enter the transaction with confidence, knowing that every facet of the property has been carefully accounted for, thereby setting the stage for a successful and dispute-free transfer of ownership.