This article has been written by Shatakshi Singh, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. 

Introduction

A purchase agreement is a contract that specifies the terms and conditions of a sale of goods. It is the most important legal document in any sale process. As a legally binding contract between buyer and seller, the purchase agreements generally relate to buying and selling goods rather than services.^[1] Purchase agreements are used in a variety of industries including telecommunications, real estate business, etc. The purchase agreement, for example, in real estate, specifies the purchase price and other terms of the title transfer.

This agreement acts as proof of the contract whether the business is buying or selling products and is particularly useful when businesses or companies are dealing with more complicated transactions. It can include many factors in terms of complexity, such as terms of payment or delivery of goods. Both the buyer and the seller must sign the purchase agreement before the payment and delivery of goods since this agreement is not binding unless it is signed by both the parties. Purchase agreements protect buyers and sellers from the risk of a breach of contract.

Aim/purpose

Purchase agreement is the most important legal document in any sale purchase transaction. Thus, before forming any purchase contract, it is very necessary for the parties to the contract to be aware and grasp the fundamentals of contract of sale and purchase in company law. Knowing what certain clauses to look for and how to interpret those contract provisions helps the parties to avoid problems/ disputes that may arise in the future and guarantee that it is in parties’ best interests and, hence, safeguarded.

How to use a purchase agreement?

The purchase agreement may be prepared by either the buyer or the seller. It can be a standard agreement that one party uses in the usual course of business, or it can be the outcome of multiple rounds of back-and-forth negotiations, much like every other contract. if new provisions are agreed outside of the standard agreement, then they can be added to a purchase agreement addendum.^[2]

Types of purchase agreement

Purchase agreements are frequently formed from purchase orders that have been agreed by both the buyer and the seller. To constitute a purchase order, buyers make requests to a seller that detail the items they want in their order. Purchase orders are classified into four groups. The distinction between them is largely determined by how much information is available at the time the order is placed. Standard purchase orders, scheduled purchase orders, blanket purchase orders, and contract purchase orders are the four forms.^[3]

Essentials of a purchase agreement

There are certain elements in a purchase agreement that are necessary to make an agreement legally binding. Whereas few other elements are proposed to protect the interest of the parties in a contract and to define terms to make the transaction as transparent and smooth as possible.

Thus, the below mentioned are the ten essential elements which leads to a good purchase agreement. The parties entering into a purchase agreement must ensure these below mentioned essential elements which are necessary for a smooth and hassle-free functioning of a purchase agreement. These essential elements of a purchase agreement are as follows:

Recognition of parties involved

A purchase agreement must specify in detail the name and address of the buyer (or buyers) as well as the seller (or sellers) along with the phone numbers of both the parties must be noted.  One must ensure that all this information is correct which can help to avoid any delays or other problems while working through the purchase process.^[4] While the purchase transaction usually involves individuals, particularly for residential properties, there may very well be a corporation or alternative entity (such as a trust) that is ought to be enclosed within the purchase. Moreover, the purchaser needs to set out how the new purchaser will own or purchase the property that is being sold and thus, the present purchaser is required to make that type of decision before the purchase agreement is finalized. If there are many buyers, they should state whether they want to act as joint tenants or tenants in common.

Identification of property

In this agreement, the property which is to be sold must be mentioned in detail. It must also include the legal description of the as incorporated in other official records of the local jurisdiction.^[5] The kind of product or goods that are to be sold by the seller and purchased by the buyer must also be involved or mentioned in this agreement.

Sample Clause

Property defined

Land, the improvements, the personal property, the leases, the operating agreements and the intangibles are hereinafter sometimes referred to collectively as the “Property.” The property shall not include any bank accounts of Seller or Seller’s right to payments of delinquent rent.

The purchase price

The purchase arrangement should incorporate the price acknowledged by the seller as well as how the buyer will be paying. Usually, there is a description of the mode of payment. The most well-known and common ways to payment includes:

1. Making full payment in cash.
2. Making a cash down payment and a new mortgage loan.
3. Some arrangement involving an extra mortgage.^[6]

Sample Clause

1. Purchaser is to purchase, and seller is to sell the property for Fifty Lac and Twenty Thousand Rupees (INR 50,20,000) termed as “Purchase Price”.
2. That the purchase price, as increased or decreased by prorations and adjustments as herein provided, shall be payable in full at closing in cash by wire transfer of immediately available federal funds to an escrow bank account of the Escrow Agent.^[7]

Earnest money deposit

When buyers make an offer, they typically pay an earnest money deposit to demonstrate their seriousness about purchasing the property. The money, that is held in escrow until closing, should be mentioned in the purchase agreement. It’s also worth noting whether the earnest money deposit will be added to the final purchase price or not. However, if the sale does not go through as planned, the agreement will usually state what will happen to the earnest money.

Sample Clause

On the date of Closing or within one Business Day of the Closing, an amount of INR 5,00,000 (“Base Consideration”) to the Seller

Items included and excluded

Structures and fixtures related to those structures that are often included in the purchase agreement of the property, in addition to the land. Unless the purchase agreement clearly states otherwise, if an object is permanently attached to the property, it is presumed to be included in the sale.

Contingencies

At times, however, the acquisition of the property is entirely contingent on another element. Thus, the seller and the buyer can make the property’s sale conditional on specific requirements being met. Contingency provisions in purchase agreements directly specify these obligations. The time for the purchase agreement is frequently affected by the contingencies that take place. Thus, in most cases, the purchase agreement specifies the anticipated closing date. The following are some of the most prevalent scenarios regarding contingencies:

• Inspection: The buyer’s contentment with the results of a house inspection performed by a third party of the buyer’s choosing is usually a condition of the purchase agreement.

Sample Clause

That the purchaser shall have the right to carry out physical inspection of the property but shall not carry out any drilling or core sampling.

• Financing: In a purchase agreement, the buyer is protected by a financing contingency if the mortgage financing falls through. If the buyer is unable to secure the necessary financing, the buyer has the option to cancel the purchase.
• Appraisal: An appraisal is required by the lender if the purchase agreement or the purchase transaction is financed with a mortgage. However, in case if the appraised value of the property is not more than the purchase price, the buyer is thus required to make up the difference or negotiate a lower price.
• Title: A title contingency guarantees that the seller owns the property and that they will receive the title at closing and thus, completion of a title report may be required as part of this contingency prior to closing as per the purchase agreement.

Closing date

The closing date should be stated in the purchase agreement, as this is when the property is transferred to the buyer who is buying that particular property from the seller. Closing costs for both the seller and the buyer should be listed, as well as who is responsible for paying them must also be mentioned in the purchase agreement.

Taxes on Property and transfer, title insurance, recording costs, prepayment of insurance premiums, and loan origination fees are just a few examples of the closing costs.

Sample Clause

Upon fulfilment of the Conditions Precedent of any or all of them by the Seller, with   respect to the closing of transfer of assets as contemplated by this Agreement (the “Closing”) shall take place on or before August xx, xxxx, or such other date as the Parties may mutually agree in writing (the “Closing Date”), by undertaking the following actions:

1. The Seller shall give to Purchaser, a certificate, dated as of the Closing Date and executed by the Seller, to the effect that each of the condition precedents;
2. The Seller shall deliver to Purchaser possession of all the right, title and interest of the Property and Purchaser shall accept the possession of the Property.

Information related to tax and other miscellaneous items

Taxes should be included in the purchase agreement and hence, in most cases, the seller will pay the taxes outstanding up to the date of the transaction. In an important part of the purchase agreement, whether VAT is included or not, or other similar taxes applicable to the operation trade will be clearly indicated. It can also include assessments, information about fixtures, etc.

Disclosures or confidentiality clause

Whether the transaction is facilitated by a stock purchase agreement, asset purchase agreement, or merger agreement, disclosure schedules are a core element of a purchase agreement.^[8] They’re usually affixed to the end of a contract and incorporated into it by reference. A badly designed disclosure schedule might expose sellers and stockholders to considerable liabilities. That is the reason why business owners and potential buyers should be aware of their significance, as well as how and why they are prepared, along with some typical scheduling mistakes.

Lists of stockholders, crucial agreements, intellectual property, employee benefit plans, outstanding debts, and other material matters of the seller are included in disclosure schedules, which thereby provides supplemental, factual information to support each of the seller’s representations as well as warranties. In purchase agreement, any exclusions to a warranty made in a merger or acquisition agreement are also detailed in disclosure schedules.

Sample Clause

The Seller (“Indemnifying Party”) hereby, jointly, agree to indemnify and hold Purchaser and its Affiliates, harmless from and against, and pay to the applicable Purchaser Indemnified Parties the amount of, any and all Losses or Encumbrances based in connection with, or resulting from:

1. The breach of any of the representations or warranties stated by the seller in this agreement;
2. The indemnified party shall make available to the indemnifying party all books and  records of the indemnified party relating to such legal proceedings or litigation brought against the indemnified party and the parties hereto agree to render to each other such assistance as they may reasonably require of each other in order to ensure proper and adequate defense of any such action, suit or legal proceeding.

Duration of contract

It refers to the length of time that each party has to complete their duties under the contract. In this situation, and if the parties agree, it should be stated in a provision whether the contract can be continued after it expires, and for how long.

It is a good idea to set a certain deadline for completing the contract.

Termination of the agreement

The termination clause in a purchase agreement is operated when either of the parties to the agreement wants to end the contract from their side in order to disassociate themselves from the agreement, whether it’s due to the end of the term, a breach of another portion of the contract, or other mutually agreed-upon reasons. It is advisable to write the contract with some protection to ensure that each portion of it can be untied without difficulty.

For instance, the parties to the contract understand that they entered the contract based on certain assumptions of trust in relation to the capacity and experience of the other party, so when one of the parties breaches the contract, the affected party is entitled to terminate the contract and seek compensation for the damages caused.

Sample Clause

This Agreement may be terminated at any time prior to the Closing Date:

1. By mutual understanding and written consent of the Parties;
2. By Seller or Purchaser if the Closing shall not have occurred on or before August  xx, xxxx (the “Termination Date”), provided that (i) the terminating party is not in material default of any of its obligations hereunder; and (ii) the Seller and Purchaser shall have the option to extend, from time to time, the Termination Date for such additional periods of time as may be mutually agreed;
3. By a written notice from Purchaser to the Seller that a Material Adverse Effect has occurred or could reasonably be expected to occur;
4. By Purchaser, in an event where the Seller have breached or failed to perform any of its representations, warranties, set forth in this Agreement;
5. By Purchaser, if any representation or warranty of the Seller are untrue, and such breach is incapable of being cured or, if capable of being cured, shall not have been cured within twenty (20) Business Days following receipt by the Seller of notice of such breach from Purchaser.

Jurisdiction and applicable laws

It is one of those many clauses in a purchase agreement which has the utmost importance in the future event of a dispute taking place between the parties, because this clause specifies which law the contract is subject to and it also mentions before whom and which jurisdiction the case must be brought before if any dispute occurs that arises from the relationship of parties as a result of the contract, its interpretation, execution, or breach.^[9]

Sample clause

Governing law

This Agreement shall be exclusively governed by and construed in accordance with the Laws of India.

Jurisdiction

This Agreement shall fall under the jurisdiction as per mutually decided by the Parties.

Signature of the parties

Certain contracts, particularly purchase agreements, must be made in writing and signed by both parties to the agreement to be legitimate and enforceable under the applicable law.

Conclusion

A Purchase Agreement is a legally binding document that outlines the parameters that the buyer and seller of a property or a possession have agreed on. It is the most important legal document in any sale purchase transaction. In essence, it lays up the agreed-upon terms of the transaction, provides a number of key safeguards for all parties involved, and establishes the legal framework for the sale to be completed. Thus, the purchase agreement to be valid and successful there has to be certain essentials that are covered under this article.

References