What is a Sales and Purchase Agreement (SPA)?
A sales and purchase agreement (SPA) is a binding legal contract between two parties that obligates a transaction to occur between a buyer and seller. Although SPAs are often used for real estate transactions, they find application in various other business arenas. This agreement finalizes the sale’s terms and conditions, representing the culmination of negotiations between the involved parties.
Key Takeaways
- A SPA is a binding legal document obligating a buyer to buy and a seller to sell a product or service.
- SPAs are commonly seen in real estate deals or when transacting a significant item or a substantial number of items.
- A SPA details crucial information including the asset, sales price, and payment terms of the sale.
- It outlines due diligence periods, pre-sale conditions, and possible remedies if the product is damaged before the sale.
- A SPA may include provisions on confidentiality, contingent sales, and broker commissions.
The Framework of a Sales and Purchase Agreement (SPA)
Before a transaction can occur, the buyer and the seller negotiate the item’s price and transaction conditions. The SPA offers a structured framework for these negotiations, typically essential for large purchases such as real estate or frequent purchases over time. Once signed, the SPA transforms into a legally-binding document reviewed and prepared by an independent third party to facilitate a smooth closing of the transaction. It also specifies the final sale’s timing.
Breakdown of SPA Components
Depending on the transaction’s magnitude, the SPA could encompass substantial content. Here are pivotal elements you may encounter in a SPA.
Asset Identification
A SPA pinpoints the specific asset being sold. In real property cases, it provides details like physical location (address, parcel numbers). This section can be less comprehensive for sales involving easily interchangeable goods.
Purchase Price and Conditions
This element delineates the transaction’s price, the upfront deposit portion, and details on the payment method for this deposit. Additionally, it outlines how the remaining balance will be paid.
SPA or PSA?
A ‘sale and purchase agreement’ (SPA) may also be referred to as a ‘purchase and sale agreement’ (PSA), with both terms representing the same type of agreement.
Due Diligence
For larger asset sales, the SPA typically mandates the purchaser acknowledge the due diligence process. It may include periods for due diligence tied to additional deposits or upfront payments. This part incorporates indemnification statements, acknowledgment of the asset’s condition, certification of termination rights under specified circumstances, and identifies team representatives authorized to make statements on behalf of the company.
Covenants/Conditions Prior to Close
This section outlines the sale’s next steps, stating conditions that must occur for the sale to be legally binding. If these conditions are unmet, it constitutes a breach of contract, potentially allowing the purchaser to terminate the sale.
Damages/Remedies
In scenarios where the asset is damaged pre-sale or during transit, this section delineates actions for both minor and major damages. It specifies different remedies applicable to each damage level.
Other Critical Sections
SPAs for real estate often include title and survey information. They may incorporate conditions regarding existing tenants or current conditions of the space. SPA often details broker commissions, including payment responsibilities and timing. Some SPAs encompass confidentiality clauses, conditions for contingent transactions and remedies, and other relevant transaction stipulations.
SPA Length
SPAs can range from a single page to hundreds of pages with numerous supplementary exhibits, depending on the details involved in the transaction.
Impacts and Examples of SPAs in the Marketplace
Real Estate Transactions
SPAs are prevalent in real estate transactions as part of the negotiation process, including agreed sales price, closing date, and contingencies.
Supply Chains
Large, publicly traded corporations might use SPAs within their supply chains to procure substantial volumes of materials or large-scale single purchases. For instance, a company may use a SPA to obtain a defined quantity of goods at a specific price.
Regular Procurements
SPAs can function as contracts for recurring purchases like monthly deliveries of raw materials or inventory, setting purchase prices in advance.
Business Acquisitions
During a company acquisition, defining SPA clauses is crucial for outlining the precise nature of what’s sold, allowing businesses to retain naming rights while selling tangible assets.
Frequently Asked Questions
What Is a Sales and Purchase Agreement?
A sales and purchase agreement is a legally binding agreement obliging a buyer and a seller to follow specified transaction terms. Both parties must sign it, encompassing all exchange terms and conditions.
Do I Need a Sales and Purchase Agreement?
A SPA protects both buyer and seller in goods exchange. While not always required, a SPA is advisable for legal recourse during a transaction, ensuring specified terms and conditions in a legal document.
Are SPAs Legally Binding?
Yes, SPAs are legally binding when signed by both parties’ authorized representatives, typically being the final document provided for asset sales to respectively execute the deal.
Related Terms: Real Estate, Confidentiality, Due Diligence, Tangible Assets.
References
- RedFin.com. “What is a Purchase and Sale Agreement?”
- Template.net. “20+ Purchase and Sale Agreement Templates”.
