Corporate Purchase Agreements (CPAs) and Real Estate Purchase Agreements (REAs) are the modern versions of real property and real estate closings. Buyer closing includes many of the same steps as residential closings, with one exception – the title search. With residential closing, you typically use an agent, not a title company, to conduct the title search. The title company’s role is limited to advising you on whom you hold the property, whether you can or should hold the property and how long you hold the property. With a CPA purchase agreement, you use a broker, not a title company, to conduct the title search. Title companies historically provided very accurate data about the mortgage, so there was a lot of “trust and faith” needed to transfer the ownership of the property.
In company purchase agreements and real estate closings, there is a third party involved in the closing process, which is the buyer. The buyer in this case is not the borrower. At the closing, once all the legal documentation is completed, the seller and the buyer sign the document collectively known as a contract. The contract contains specific language regarding due diligence, which is technical jargon that has no bearing on the “due diligence” part of the transaction. The contract also contains language regarding the buyer’s responsibility for paying accrued expenses, and it provides for the responsibilities of the seller.
When drafting a company purchase agreement, the parties need to address the specific needs of the buyer. Buyers have several options when it comes to addressing due diligence. First, the buyer may use the services of an attorney or real estate professional. Alternatively, the buyer may choose to do the work itself, with the assistance of an independent Realtor. In some cases, the seller will be responsible for all of the costs associated with the due diligence process. In other cases, the seller may be responsible for only the cost of financing.
One common issue in company purchase contracts is what happens if something happens to the property while the property is in the seller’s possession. For example, suppose the buyer is unable to close a deal because the property was vandalized sometime before closing. What would happen to the funds obtained from the loan? Without access to the property, the buyer would not be able to get his/her money back. This could result in a default of the loan (see “Default”), and penalties or delays in the payments of interest and fees.
In the event of a bankruptcy for a company, the proceeds of the assets must be properly distributed. If the assets are insufficient to pay for the purchase price, then the creditors will likely be retained, and the remaining funds are expected to be paid out to the buyer. In the case of a failed asset deal, the buyer would be forced to sell the property at an auction, which would mean that any proceeds would have to be used first to satisfy the debt of the creditors, and then to make a down payment on the new acquisition to close the transaction. This is referred to as “Lieu Funding”, and is completely within the control of the buyer.
Another issue is the failure of the buyer to perform due diligence on the acquisition. If the vendor does not perform due diligence on the property to prepare a purchase price, the buyer will never receive the full purchase price. Due diligence requires the diligence of the seller to obtain information about certain items, such as the location of the property and its condition, its probable value, and other relevant information. It is beyond the scope of this article to discuss what information a seller must obtain and why he/she must perform it.
One area where company purchase contract laws can cause problems is when there is a lack of funding for acquisition. Suppose the Company X is in the process of purchasing a particular property, and has applied for financing. Company X is granted a loan by a lender that is an underwriter. However, Company X is not able to fulfill all of the obligations to repay the loan, such as due diligence or appraisal of the property. When Company X does not perform its due diligence obligations and attempts to sell the property before the due diligence deadline, the Company X will be liable to pay damages to the lender for breach of contract. Similar situations may arise if Company X is unable to obtain financing or if it is required to pay damages in advance for breach of contract.
In summary, the most important thing to remember when considering a company purchase contract is that a buyer is rarely allowed to make a default in the obligation of due diligence, if it is performed properly. Also, if the buyer fails to perform the required due diligence, he/she will almost always be held liable for breach of contract. Finally, the purchaser must ensure that he/she complies with all of the closing requirements, such as preparing a purchase contract, inventory requirements, etc., in order to close the transaction. In short, if a buyer is interested in obtaining a purchase contract for his/her business, it is important to do the due diligence necessary to ensure that you are protected from all risks. If the buyer fails to do this, he/she may find himself/herself at a disadvantage when negotiating the purchase price.