Mid Atlantic Real Estate Journal — Brokerage Directory — July 26 - August 15, 2013 — C
www.marejournal.com
B rokerage D irectory
By Charles Katz-Leavy, Verrill Dana, LLP Commercial option agreements versus purchase and sale agreements
M
ost purchasers and sellers of commercial real estate are fa-
chase and sale agreement may be better for you. A purchase and sale agreement typically has a shorter term than an option agreement, typically requiring closing within 30 to 120 days. Therefore, you will be required to work on an expedited schedule in order to meet the closing deadline. If you need an extended pe- riod of time to decide whether to close on the property, an option agreement may be a better choice. Option agree- ments often run for a longer period, sometimes several years. This gives you time to line up financing, conduct due
diligence inspections, obtain permits, and ultimately decide whether to close on the acqui- sition of the property. If you need to extend the term of the option, you may be able to do so by making additional option payments. Deposit vs. Option Payment A purchase and sale agree- ment usually involves a de- posit that is credited towards the purchase price. In most cases the deposit is a percent- age of the total purchase price and is held by an escrow agent. Generally, you will receive a full refund of the deposit if you
elect not to close on the prop- erty as a result of financing problems, inspection issues, or other contingencies. After the contingency period, the deposit becomes nonrefundable. An option agreement re- quires you to make an initial option payment that may or may not be credited towards the purchase price. The size of the option payment usually is tied to the length of the option, with longer-terms requiring larger payments. The option payment is usually paid to the seller and is nonrefundable unless the seller defaults un- der the option agreement. In
rare instances you may be able to negotiate for a refund if you elect to terminate the option agreement due to inspection issues or other contingencies. Liability Under a purchase and sale agreement, you are obligated to close after the period for inspections and other contin- gencies has run, and may even be liable for damages beyond the deposit if you fail to close. Conversely, option agreements allow you to close at any time during the option term, which means you have more flex- ibility regarding whether and continued on page 28C
miliar with purchase and sale agree- ments, but many do not fully under- stand options agreements. This article e x p l a i n s some of the
Charles Katz- Leavy
differences and offers insight into deciding which agreement may be preferable.
Understanding an option agreement?
At its most basic level, an op- tion agreement is a non-bind- ing right to purchase a piece of property at a fixed price within a specified period of time. For example, assume you identify a specific property that youmay want to purchase only after undertaking some critical due diligence, e.g., you need to raise funds from in- vestors or review complicated zoning and permitting issues. You explain to the seller that you are interested in the prop- erty, but you need some time to make a final decision. The seller tells you that if you pay $2,500 now, he will reserve your right to purchase the property at a predetermined fixed price anytime during the next 18 months. If you elect not to purchase the property, you simply lose your $2,500 option payment. This is an option agreement. So how do you decide whether to use a purchase and sale or an option agreement? Certainty If you are confident that you will purchase the prop- erty (subject to standard due diligence), a purchase and sale agreement is likely your best choice. If your decision is contingent upon numer- ous considerations, such as financing, securing permits, etc., an option agreement may better suit your needs. The reason boils down to what you are actually purchasing. In a purchase and sale agreement, you are starting the process of purchasing the property itself. In an option agreement, you are purchasing the right to acquire the property for a fixed price over a predetermined period of time. Timing If you are ready to act, a pur-
We have the experience to guide you all the way from the property line to the dotted line.
No matter how big or small your real estate project is, we have the right size team to efficiently see you through.
Contact: Attorney Charles M. Katz-Leavy (207) 253-4920
Portland, ME • Boston, MA • Augusta, ME • Stamford, CT • Washington, DC www.verrilldana.com
VERD.17249 RealEstatePracticeAd.2013.FR_v4.indd 1
7/18/13 11:45 AM
Made with FlippingBook - Online catalogs