A purchase agreement outlines the legal rights that govern the sale of an asset. The specific clauses and risks addressed in a purchase agreement largely depend on what is being sold. Different issues will have to be considered turning on whether the transaction involves goods, real estate, an entire business, or some other asset.
Generally, any purchase agreement should outline the following: the parties involved in the transaction, a description of the underlying asset, how liabilities associated with the asset will be distributed between the parties, and any warranties or guarantees that the parties wish to make. This ensures that both parties have clearly delineated their legal rights with respect to the asset and one another.
For example, if one is selling a good, the purchase agreement may establish the mechanism for delivery and who bears the risk of associated liabilities. If the delivery includes shipment, the agreement can establish who pays for shipping and who pays if any potential issues during the shipping process materialize. So, for instance, the agreement may state what happens between the parties if the goods become damaged during shipping.
Warranties also help clarify the rights that each party has with respect to an asset. If an entire company is being sold, it is standard to outline a set of representations and warranties regarding the firm. These are promises made by the seller that the asset is as has been described to the buyer. For example, the seller might warrant that the company has no major ongoing litigation. If it turns out that this was not the case, then the buyer may have a right to file suit and seek damages from the seller.
Everyday real estate transactions operate in a similar way. When selling a home, a seller might represent, or promise, to the buyer that there are no termites in the home’s floorboards nor had there been during the year preceding the sale. If it turns out that there were termites within that timeframe, the buyer may have a legal right to recover the value of the harm caused by that termite infestation.
A purchase agreement may also outline terms and conditions for the closing of a sale. This is particularly the case when a company or a piece of real estate is being sold. In the case of a real estate sale, a buyer may request that the property has to pass certain inspections in order for the deal to close. There are generally fewer closing conditions for buyers to meet than sellers insofar as the buyer’s only primary obligation is to provide some sort of consideration or payment for the asset. A seller may have to vouch for a whole host of contingencies related to the asset.
Relatedly, the seller will often be expected to outline details regarding the condition of the asset in a legally binding manner. This is generally reserved for the riskiest aspects of the asset. Consider the above example of a company being sold and asserting in a purchase agreement’s representations and warranties that it has no major ongoing litigation. If that company does have any ongoing major litigation, it may attach a disclosure schedule that states each of the exceptions to that representation. In this way, the seller can more clearly define what sort of asset they are passing along so as not to be liable for aspects of the asset that were communicated to the buyer.
Ultimately, drafting a purchase agreement requires thinking about the asset and the transaction process to determine all significant associated risks and then outlining who bears what risks in the contract.
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