Most buyers won’t buy property without inspecting it. Sometimes a buyer may want to inspect even before signing a purchase agreement.
The inspection provisions deserve careful attention. Here are three questions every seller should ask when negotiating the buyer’s inspection rights. But first, ask the most important question - Can I enforce the buyer’s promises concerning the inspection?
You can skip this question if the purchase agreement will be signed before the inspection starts. But what if the buyer wants to start before a purchase agreement has been negotiated, much less signed? If that’s the case, you may need a separate right of entry agreement.
A right of entry grants the buyer the right to enter the property for a stated purpose. You can use a right of entry to cover the same concerns as the inspection provisions of the purchase agreement. A right of entry is a must if there is only an unsigned term sheet, or a term sheet that was signed only by the brokers.
A right of entry can also be helpful if the buyer and seller are signing a letter of intent. Putting the inspection provisions in a separate right of entry makes it harder for the buyer to argue that those provisions weren’t binding. It also helps keep the letter of intent shorter. Just make sure that the letter of intent does not say the buyer can start its inspection without first signing an acceptable right of entry.
If you don’t want to use a separate right of entry, make sure the letter of intent covers three important points. First, even if other provisions are non-binding, the letter of intent should state that the inspection provisions are binding immediately. Second, it should state that those obligations of the buyer survive even if the deal terminates. Third, it should cover all the inspection-related issues you would include in a purchase agreement.
Now let’s turn to the Top 3 questions every seller should ask when negotiating those provisions, whether in a purchase agreement, a right of entry, or a letter of intent.
1. Have I put appropriate limits on the buyer’s activities?
Have I required the buyer to respect the rights of the tenants and other occupants? Do any tenants have special privacy needs that need to be respected, such as medical offices, research facilities, or health clubs? Is there information that you have promised not to disclose, such as a tenant’s report of gross sales?
Does the agreement require the buyer to get your written consent before conducting soil borings or other intrusive inspections? Can you withhold that consent in your sole discretion? If you haven’t reserved sole discretion, how long can you take to consent or refuse, and what are reasonable grounds for saying no?
Are you willing to let the buyer talk with your tenants, service contractors and other third parties? If the contract doesn’t restrict that right, assume that the buyer will talk with them.
You probably don’t want to withhold a lease or an engineering report. But what about lease abstracts? Leasing or other marketing plans? Appraisals of market value? Have you excused yourself from providing attorney-client communications, such as a legal analysis of a tenant dispute?
2. Am I taking on costs or liabilities that the buyer should pay?
Does the buyer agree to repair all damage caused by the inspection? Better yet, give yourself the right to choose between repairing it yourself at the buyer’s cost or having the buyer make the repairs.
Suppose someone is injured or killed during the inspection, or someone’s property is damaged. Make sure the buyer has agreed to indemnify the owner, the property manager, and perhaps the lender. Has the buyer waived its employer’s immunity under the Ohio worker’s compensation law? If not, the indemnity may be unenforceable if the injured person was the buyer’s employee.
The buyer’s indemnity promise is only as good as the buyer’s net worth. Buyers are often single purpose entities. Have you required the buyer to supply liability insurance? Are the owner and the property owner listed as additional insureds? Has your risk manager or insurance agent approved the coverage type and amounts? Make sure the agreement requires the buyer to supply proof of coverage before the buyer can enter the property.
What if the buyer fails to pay one of its inspection companies? The inspection company may not be entitled to a mechanic’s lien, but you should not have to bear the cost of fighting that lien in court. Has the buyer agreed to remove the lien and reimburse you for your expenses and liabilities?
Finally, you don’t want to be sued over a mistake in a document that someone else prepared. Has the buyer agreed that you are not vouching for the accuracy of surveys, title insurance policies, environmental reports, or other information prepared by third parties?
3. Have I restricted what the buyer can do with the information?
If not, the buyer can use it for any purpose. Have you required the buyer to keep the information confidential and to return the information, including all copies, if the deal does not close? Have you required the buyer to obtain confidentiality agreements from its own agents and consultants before giving them access to the information?
Keeping it real.
Letters of intent have led to multimillion dollar lawsuits, even when one party thought the deal was conditioned on the parties signing a more comprehensive agreement later. As with any other legal document, signing them without an attorney’s review can be an expensive way to save money.
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