What is a Purchase and Sale Agreement?

A purchase and sale agreement, sometimes called an agreement of purchase and sale, is a detailed contract that formalizes the intention of both buyers and sellers in a transaction. This legally enforceable document details the transaction, including the specific assets being transferred, payment terms, timelines, and conditions that must be met before the sale is finalized.

Purchase and sale agreements are foundational to complex transactions, especially in real estate and business acquisitions. They protect both parties by:

Establishing clear legal obligations
Preventing misunderstandings about transaction terms
Creating a roadmap for the closing process
Providing remedies if either party fails to meet their obligations

Purchase and Sale Agreement vs. Purchase Agreement

Although similar, a purchase and sale agreement and a standard purchase agreement differ in a few key ways.

A standard purchase agreement is typically a simpler document used for straightforward transactions with minimal contingencies. These contracts often involve:

Consumer goods purchases
Standard retail transactions
Simple sales with immediate transfer of ownership

In contrast, a purchase and sale agreement is more comprehensive and suited for complex transactions with multiple conditions and a longer timeline between agreement and closing. PSAs are commonly used for:

Real estate purchases
Business acquisitions
Large asset sales
Transactions requiring due diligence
Deals with multiple contingencies

The main difference is the level of detail and protection. While a standard purchase agreement focuses primarily on price and basic terms, a purchase and sale agreement includes extensive provisions for contingencies, due diligence periods, and specific contract performance requirements.

Example of a Purchase and Sale Agreement

Consider this example to understand how a purchase and sale agreement works:

Sarah is purchasing a commercial property from ABC Corporation for $750,000. Their purchase and sale agreement includes the following:

Identification of Sarah as the buyer and ABC Corporation as the seller
Detailed legal description of the commercial property
Purchase price of $750,000 with a $25,000 earnest money deposit
Financing contingency requiring Sarah to secure a commercial mortgage within 45 days
Property inspection contingency allowing Sarah 14 days to complete inspections
Environmental assessment contingency requiring a clean Phase I report
Seller's obligation to provide clear title
Closing date scheduled for 60 days after contract signing
Provisions for what happens if either party defaults

What Is Included in a Purchase and Sale Agreement

A comprehensive purchase and sale agreement contains several elements that protect the interests of both buyers and sellers. Understanding these components ensures your agreement addresses all aspects of the transaction.

Parties Involved

This section identifies the buyer and seller and any agents or representatives involved in the transaction. It includes the full legal names of all parties, their contact information, and specific roles in the agreement. Proper legal designations must be included for business entities to ensure the contract binds the correct organization.

Accurately identifying all parties is critical to creating an enforceable agreement that establishes who holds certain rights and responsibilities outlined in the document.

Property Description

The property description outlines exactly what is being transferred in the transaction. In real estate, this includes legal descriptions that clearly identify the property boundaries and location. For business asset sales, this consists of detailed inventory lists specifying the included items.

The description must be sufficiently specific to eliminate ambiguity about what the buyer is purchasing and what the seller is transferring. Accurate specifications are essential in real estate deals, as property boundaries, easements, and included fixtures must be clearly documented to avoid potential disputes later on.

Purchase Price & Payment Terms

This section documents the agreed purchase price and outlines the structure for payment. It tells both parties the total amount and how and when payments will be made. The agreement may detail various payment structures, including initial deposits, financing arrangements, and installment plans.

For transactions involving financing, this section addresses loan contingencies and requirements. It may also cover adjustments for prorations of taxes and utilities and allocations of closing costs between parties.

Contingencies:

Contingencies are conditions that must be met before the sale is finalized. These provisions protect buyers and sellers by creating clear expectations about what must occur before the transaction becomes binding.

Common contingencies include financing approval, satisfactory property inspections, and regulatory approvals. Each contingency should specify timeframes for completion and outline the consequences if conditions cannot be met.

For example, a financing contingency allows buyers to exit the agreement without penalty if they cannot secure acceptable mortgage terms within the specified period.

Closing Date:

Setting a closing date in the purchase and sale agreement establishes when ownership officially transfers and creates deadlines for meeting all contingencies. Key factors, such as loan approval timelines, inspection periods, and due diligence requirements, can influence the closing date.

The agreement typically addresses potential extensions and the notice required for delays. A defined closing timeline helps both parties plan appropriately while maintaining momentum toward completing the transaction.

Earnest Money Deposit

An earnest money deposit demonstrates a buyer's serious intent to complete the purchase. This deposit, typically held by an escrow agent, provides security for the seller while contingencies are being addressed.

The PSA specifies what happens to this deposit under various scenarios. If the deal closes successfully, the earnest money usually applies toward the purchase price. If the buyer backs out for reasons not permitted by the contract's contingencies, the seller may be entitled to keep the deposit.

Disclosures:

This section addresses mandatory disclosures the seller must provide, which are essential in real estate transactions. Sellers are typically required to disclose known property defects, environmental hazards, and other material information that might affect the buyer's decision.

Examples include structural issues, flood risks, hazardous materials, and any pending legal actions affecting the property. Proper disclosures protect sellers from future liability while ensuring buyers have the information needed to make informed decisions.

Default & Remedies

The default and remedies section explains what happens if either party fails to meet the agreement's terms. It defines what constitutes a default and outlines the process for notifying the defaulting party.

This section specifies the legal remedies available, including contract termination, financial penalties, or specific performance. For instance, if a seller fails to provide a clear title, the buyer might be entitled to terminate the agreement and recover their deposit plus expenses.

Conversely, if a buyer defaults without justification, the seller might retain the earnest money deposit as liquidated damages.

Why Is a Purchase and Sale Agreement Important?

A well-crafted purchase and sale agreement is both a shield and a roadmap for buyers and sellers. Far from being just another legal document, a PSA often makes the difference between a smooth transaction and a costly legal nightmare. When substantial assets or properties change hands, having clear, written terms protects everyone involved and creates a foundation of trust.

For buyers, a PSA:

Ensures they get exactly what they're paying for
Provides exit options if contingencies aren't met
Creates a timeline for due diligence
Establishes a seller's obligations for property condition
Documents all promises made during negotiations

For sellers, a PSA:

Confirms the buyer's financial commitment
Limits opportunities for the buyer to renegotiate
Sets clear expectations for closing
Defines what happens if the buyer backs out
Reduces liability for undisclosed issues

Beyond protecting the immediate parties, purchase and sale agreements also:

Create clear documentation for lenders and title companies
Establish a framework for resolving disputes
Provide evidence of transaction terms for tax purposes
Reduce the likelihood of expensive litigation
Create certainty and predictability for all stakeholders

With effective contract visibility and management, organizations can ensure their purchase and sale agreements consistently protect their interests while facilitating smooth transactions.

When Do You Need a Purchase and Sale Agreement?

Knowing when to use a purchase and sale agreement can save time and prevent legal headaches. These contracts aren't necessary for every transaction, but they're essential safeguards in several high-stakes situations like:

Real Estate Transactions

Whether residential or commercial, real estate purchases almost always involve a purchase and sale agreement. The significant value, complex legal considerations, and numerous contingencies in property transactions make a detailed PSA essential.

Business Acquisitions

When purchasing an entire business or substantial business assets, a PSA protects the buyer and seller by clearly defining what assets and liabilities are being transferred and under what conditions.

High-Value Asset Sales

Transactions involving expensive equipment, vehicles, or unique assets benefit from the protections of a purchase and sale agreement, particularly when financing, inspections, or regulatory compliance are involved.

Complex Transactions with Contingencies

Any transaction where closing depends on multiple conditions being met should utilize a PSA to establish clear expectations and timelines.

Situations Requiring Due Diligence

When buyers need time to investigate what they're purchasing before finalizing the transaction, a PSA provides the legal framework for this process.

The more complex the transaction and the higher the value, the more critical a comprehensive purchase and sale agreement becomes. Using a purchase and sale agreement template as a starting point allows parties to customize the contract to their specific needs while ensuring all essential elements are included.

Common Contingencies of a Purchase and Sale Agreement

Contingencies establish conditions that must be met before a transaction can close. These provisions protect both parties by creating clearly defined exit options if specific requirements aren't satisfied.

Financing contingency: Allows buyers to cancel and recover their earnest money if they can't secure financing within a specified timeframe.
Inspection contingency: Gives buyers the right to inspect the property and request repairs, price adjustments, or cancellation based on findings.
Appraisal contingency: Protects buyers from overpaying by allowing renegotiation if the appraisal comes in below the purchase price.
Title contingency: Ensures buyers receive a clear title and permits cancellation if title problems can't be resolved.
Due diligence contingency: Common in business acquisitions, allows thorough investigation of all aspects before committing to the purchase.
Regulatory approval contingency: Provides an exit if required government or regulatory approvals can't be obtained.

Well-drafted contingencies create certainty about transaction timelines and protect both parties' interests if conditions can't be met.

Use Icertis to Simplify Purchase and Sale Agreements

Managing purchase and sale agreements effectively requires robust systems for creation, negotiation, tracking, and compliance. Contract management software like Icertis transforms how organizations handle these critical documents by providing comprehensive contract lifecycle management capabilities.

The Icertis Contract Intelligence (ICI) platform accelerates the drafting process, streamlines negotiations through collaborative redlining, and ensures compliance with automated checks and regulatory integration. From efficient contract authoring to enhanced contract visibility and performance tracking, Icertis offers specialized functionality for industries where purchase and sale agreements are common, including real estate contract management.

By implementing contract intelligence solutions, organizations transform purchase and sale agreements from static documents into strategic assets that drive business value while reducing risk, resulting in faster transactions, fewer disputes, and better outcomes.

To learn more about how Icertis Contract Intelligence can help streamline your contract management, request a demo today.

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What is a Purchase and Sale Agreement?