What is a P and S Agreement?

A Purchase and Sale Agreement (often called P and S) is the contract between a buyer and seller of real property. It is usually a one to four page document, accompanied by the "exhibits" which typically include a deed, mortgage, power of attorney, tenant estoppel letters, condo documents, etc.
The purchase and sale agreement sets forth how much the buyer is paying, when it has to be paid, when the closing is going to occur, whether the buyer is getting a mortgage, whether the seller is providing a note, when the buyer is taking possession , how many post closing obligations the parties have and the conditions upon which the buyer has to pay the seller forfeited deposits. The purchase and sale agreement can also have a number of other clauses in them from noncompetition agreements to an undertaking to obtain a liquor license.
A Seller will use a purchase and sale agreement to determine how valuable its property is, what issues it has to deal with at closing and what post-closing obligations. Buyers will use the purchase and sale agreement to determine how good their deal is. Whether it is a one family house or a $100 million shopping center a buyer or seller will want to know before they sign on the dotted line how much the property being sold before it closes or they buy it is worth.

Components of a P and S Agreement

The key elements of a p and s agreement include a description of the property which is the subject to the sale, the purchase price, methods of financing including any deposit or deposits which will be required to be tendered at various times, terms, contingencies such as inspections to be conducted and any contingency of financing, the date set for closing, any credits to which the buyer may be entitled at the time of closing to premiums and costs previously paid by the seller on mortgages, taxes and other charges, agreed to apportionments, a description of any tenants and leases which may be associated with the property, a list of exclusions on the closing of the sale, the manner in which title is to be taken and generally the converter of the deed accepted by the parties.

Distinction Between Offers and P and S Agreements

When you make an offer on a property, you will often be required to present P and S agreements to the seller. You may wonder, what is the difference between an offer and P and S? The offer is your first proposal to buy the property. It may include price and terms, but it does not have to. The offer is basically your letter to the seller saying I want to buy your land and here are the ways in which I propose we do business together. The P and S agreement is that offer written into a legal contract. So once you are accepted, you have agreed to do business with those people under those terms. And that they each have committing obligations to each other, which protects each party. For the buyer it protects them to get the money they are paying to buy the property. For the seller it protects them to get the money that they were promised to be paid as well as protects their legal obligations for selling the property such as obtaining a cleared title.

Common Contingencies Found in P and S Agreements

Purchasers can insert various contingencies into the purchase and sale agreement, most of which, as stated above, are within the purchaser’s control. Generally, the contingency clauses may include financing contingencies, inspection or due diligence contingencies and marketable title contingencies.
If the property is subject to a mortgage, a financing contingency will typically be in the purchase and sale agreement, which requires the purchaser to obtain particular financing in order to proceed with the transaction. Often the financing contingency is satisfied without any problems, however, more often than not the lender’s requirements for the issuance of the mortgage require the borrower to do something outside of their control, such as obtaining the lender’s approval of the environmental assessment, or the issuance of a Phase I to identify potential contaminants prior to obtaining the mortgage. In these cases, the mortgage terms can become unfulfilled due to factors outside of the purchaser’s control unless the purchase and sale agreement clearly defines the required role of the seller in the due diligence process.
Inspectory due diligence contingencies typically allow a purchaser to have the property and/or its personal property inspected. If the property is commercial, the purchaser may want to conduct an environmental assessment. Oftentimes the results of these inspections or assessments can result in conditions that must be addressed. If a seller is unwilling to address those conditions or negotiate a lower selling price that accounts for any conditions that cannot be resolved, then most likely the property is not worth purchasing at the current terms set forth in the purchase and sale agreement.
Sellers are held to a standard of providing their buyers with marketable title to the property. Therefore, a marketable title contingency is another contingency frequently found in residential and commercial real estate purchase and sale agreements. The title is usually required to be marketable in order to be conveyed. If the purchaser identifies that the title is not marketable, the purchaser has the option to terminate the agreement to receive a refund of the deposit and terminate the transaction. However, before the purchaser terminates the purchase and sale agreement due to the unmarketability of the title, the purchaser should contact an attorney to see if the defect can be removed or if the title insurance will prevent the defect from being a problem after closing.

Legal Effects of a P and S Agreement

A purchase and sale agreement binds the parties to certain legal obligations once it is signed. (G.L.c. 259-2(A)). In fact, a binding contract can arise even when there is a dispute over the meaning of the language included in the agreement. However, the major requirements under the statute are that the contract must be in writing, signed by all parties, and must contain the following: 1) a description of the real estate; 2) the names of the parties; 3) the consideration (price); and 4) the terms of payment. (G.L.c. 259-2(A)). Furthermore, until the buyer receives title to the property, with a few limited exceptions, he/she is not able to pursue legal action for damages in the event the seller fails to perform his/her obligations under the agreement. Importantly, the statute provides an exception for situations where the seller fraudulently refuses to perform. In such a situation, the buyer is entitled to recover damages and may be able to specifically enforce the contract. (Rosenberg v. Eccleston, 344 Mass. 247, 248 (1962)) . Thus, while the general rule is that damages for nonperformance are unavailable until a buyer receives title to the property, the seller’s fraudulent nonperformance is an exception to this rule. Additionally, in some situations the buyer may be able to argue that they should be able to recover damages based upon the defendant’s bad faith refusal to perform. (see, e.g. Crowell v. Powloski, 348 Mass. 627, 630-631 (1965),(where the court noted that the fundamental principle of good faith has been recognized as a limiting factor to a party’s right to breach a contract.)). However, without a legal basis for damages, the plaintiff is left perhaps with his/her sole remedy being recovery of earnest money deposit. Replevin (return of property) is available if the buyer seeks property other than the deposit. (Avalonbay Communities, Inc. v. Abbott, 52 Mass.App.Ct. 721, 724 (2001)). However, replevin is only appropriate when money or bank deposits are involved. Id. If the only thing at issue is the payment of a consideration deposit, a mere action in contract will suffice.

Guidelines for Creating an Effective P and S Agreement

When dealing with a purchase and sale agreement (or due diligence) opportunity, I’ll bet the farm that you will have to decide whether you’re going to craft the P and S agreement yourself or hire a lawyer to craft the P and S agreement for you. If you choose to have a lawyer do it, let me warn you to tell him/her that you want the P and S agreement drafted in a clear and concise manner. I say this because many lawyers (and many law firms) do not take the time to draft a clear and concise P and S agreement and just crank out a boilerplate form which needs numerous amendments before being final.
If you choose to draft the P and S agreement yourself, here are some simple steps to follow:

  • Make a list of all of the major terms of the deal. A good place to start is to pull out a form P and S agreement and make a list of the top ten important provisions of the deal, and if you think of more terms, keep on adding to the list. You can then use that list to decide what the most important terms of the deal are and you can also use the list to make sure you don’t forget any terms or conditions that were agreed to. If you had a verbal discussion that something would be included as part of the deal, but there is no written reference to this term, then it’s probably missing or not part of the deal.
  • Once you have a list of the terms that are agreed to, you can start drafting a checklist of terms. A checklist is a way to include all the terms and conditions of the agreement into one checklist. The checklist should include all of the provisions of the P and S agreement. And the checklist should include comment sections next to the provisions so that you can reference a specific provision of the P and S agreement and tell the reader what the term refers to or what the term means.
  • After you have a checklist of the terms that were actually discussed and agreed to, you must begin the process of drafting the P and S agreement. Like the checklist, the P and S agreement must include all of the provisions, terms and conditions of the P and S agreement and it must mirror the checklist. If the P and S agreement does not mirror the checklist, simply flip the two documents and see which one of them is missing provisions that were discussed and are part of the deal. As you can imagine, this process takes a long time to complete but now that you have the checklist it becomes easy to determine whether the P and S agreement incorporates all of the terms and conditions of the deal.
  • Once you have a draft of the P and S agreement, proceed with a few rounds of redlines until you have a final version of the P and S agreement.
  • Finally, once you have a final version of the P and S agreement, you should have the executed agreement reviewed by a real estate attorney to look for any mistakes, provisions that should have been included but were not or any shortfalls of the provisions. An example would be if there is a reference to "a deposit will be delivered to Buyer by the close of escrow," but then there is no section in the P and S agreement that discusses when the deposit or funds will be paid, at what point, how much, etc. We’ve seen the situation occur where it says at the end of the P and S agreement that "Buyer acknowledges that a deposit is due" but then refuses to pay the deposit because there is no clear provision in the P and S agreement about when, how and how much of a deposit needs to be made.

We’ve seen this set of circumstances occur more than once. Of course, it generally takes at least a couple of weeks to get through the process of drafting a P and S agreement, amending it a few times and then executing it. The major question begs the answer to what happens to the successful bidder if he/she decides they will not close if the seller doesn’t make the amendment to the P and S agreement to fix the mistake the buyer is complaining about. However, for a buyer to do such a thing could mean that they will lose their deposit and the property and there will be another round of negotiations with the seller.

Pitfalls to Avoid When Crafting P and S Agreements

Mistake #1: Treating the P and S Agreement as an afterthought or "just a piece of paper." Commonly this client does not really want to hire a lawyer and thinks he or she can simply sign the P and S Agreement and that this is all that is necessary. Missing or incomplete information and terms will come back to haunt both parties after the P and S Agreement is signed. Both parties should review this important legal document with their attorney to ensure all known terms and provisions are included and properly worded.
Mistake #2: Treating the P and S Agreement as a formal contract signed by the attorneys. The lawyer wordage has little usefulness if any to the buyer or seller. While the attorneys want and expect their contract to be interpreted according to our wordage we know that each person involved (other than lawyers) reads it as he or she wants to read it. They do not think about the issues that need to be covered. We lawyers have training in thinking of the various issues that normally come up in any purchase and sale transaction. Think of it this way: if a court case develops the judge will look at the boilerplate and try to fill in the blanks where there might be missing terms, provisions or other items to figure out what the parties intended. We call this a good faith attempt to interpret the parties’ intent. However, judges have their own way of interpreting, again according to their training. So we lawyers know that the language we use is open to interpretation by the judge. We often believe that the court will agree with our interpretation of the P and S Agreement, but there are no guarantees.
Mistake # 3: Not thinking through all of the information needed for the P and S agreement. As an example, the buyer decides that the home to be purchased has to be a foreclosure and if the property is not a foreclosure then the buyer is not interested in purchasing the property. The buyer will expect the seller’s realtor to do the lender research. However, the buyer is not providing the real estate company with the information it needs to do the research. It is better to get a back up or second choice property located first to be used in the event of failing to get a foreclosure, simply because foreclosures are on a timetable and usually sell in three weeks or less. If the seller does not have adequate time to close in 30 to 45 days the purchase may fall through. In addition, if the buyer is always looking for the perfect spouse or perfect job, they may not be willing to settle and just keep waiting for the "right one" to come along, then fall short of the deadline in the P and S Agreement where time is of the essence. Be sure you have the other side doing his or her part to get the deal done if you expect to close on the property.

When to Call In Legal Help for P and S Agreements

In most instances, an offer to purchase agreement ("P and S") does NOT need a lawyer’s input and is in fact best done without professional legal help. For example, almost all brokers sell residential real estate using the same standard Massachusetts form called the "Betterment Form". That form is written perfectly well and when completed properly, seldom has legal problems thereafter. The seller simply agrees to sell the house and all its fixtures in "as is" condition without any warranties whatsoever as to what is inside of those walls. Nothing needs to be inspected or examined prior to the buyer’s signing that P and S as he will have the right to have the house inspected and will be able to walk away from the deal for any reason during the inspection period.
On the other hand , any commercial or multi-family property P and S is usually extremely complex and should be drafted and negotiated with much more care and thought. Almost any disputed provision in a commercial or multi-family P and S is going to make the news somewhere. Those transactions have been litigated all the way to the State Supreme Court on occasion.
Any time that you are negotiating a contract that involves a large sum of money it becomes a very good idea to run those negotiations by your lawyer to see if maybe those negotiations do not become an extremely expensive game of chicken with probably no winners at the end of the day.
Also, you should work with a lawyer whenever you buy or sell a smaller scale property. Most small commercial transactions also do not warrant complex drafting or review of the contracts yet should be examined by a lawyer for compliance with local law and whether the seller has the right to sell the property in particular.
In addition, P and S contracts involving the sale of real estate can often be part of an overall business deal where the real estate itself is just a part of the big picture. Making sure that the P and S regarding the real estate fits into the overall business deal should never ever be done without a lawyer.