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What is a Purchase and Sale Agreement? Know the Basics

man working on purchase and sale agreements from a laptop

A purchase and sale agreement, also called a sales and purchase agreement or a purchase and sales contract, is a legally binding document that parties in a transaction use to stipulate the terms and conditions that will guide the sale and transfer of goods or property.

A key thing about a purchase and sale agreement is that it does not transfer the property or goods that the parties are negotiating. What it does is create an obligation for the seller to sell, and an obligation for the buyer to buy.

Transactions that use purchase and sale agreements, such as real estate transactions, are complex transactions that may span into weeks and involve lots of processes and stages. These agreements provides a clear roadmap so parties know what they can expect at each point.

A purchase and sale agreement is not the same as a purchase agreement. A purchase agreement is the final document used to transfer a property from the seller to the buyer, while a purchase and sale agreement specifies the terms of the transaction. Parties will sign a purchase agreement after both parties have complied with the terms of the purchase and sale agreement.

A purchase and sale agreement is also not a purchase order. A purchase order is a document that contains a list of supplies or products a buyer wants to buy from a seller.

What is the purpose of a purchase and sale agreement?

A purchase and sale agreement is used to document the parties’ intentions and the terms they have agreed will govern the transaction. You can include specific terms like the product or property, the price of the product or property, conditions for the delivery of the product, and the date of product delivery.

Writing these things down protects each party’s interests by ensuring that there is a legally binding agreement they can resort to if there is a dispute. It also protects any deposit the buyer makes on the transaction and secures their commitment.

In real estate transactions, parties use these agreements to make provisions for the buyer to inspect the property. It also details any defects the property has that are known to the seller. The contracts usually contain conditions that could lead to the termination of the agreement; for example, if the buyer is not satisfied after inspecting the property.

When do I need a purchase and sale agreement?

We mentioned earlier that they are commonly used in real estate transactions; however, you can also use them in other types of property transactions, like vehicle sales.

Purchase and sale agreements are also used in the transactions of company stock. Parties can also use them where a business is acquiring another business.

In addition, you may use it when purchasing large-volume and expensive materials from a supplier when the supply will span over a period of time. This can be useful for routine purchases of these types of supplies since it helps suppliers and purchasers keep an estimate of demand and cost.

Elements of a purchase and sale agreement

To write a purchase and sale agreement, you’ll need to include the following elements:

  • Identity of the parties: Include the names of the parties in the transaction. Parties in the agreement may be individuals or organizations. Ensure that you write their full legal names and their contact information.
  • Description of the property or products: Describe the property or the product in absolute detail. Make sure that the description identifies the property without any ambiguity. If the subject matter is a product, state the quality of the product and specifications.
  • The purchase price: State the price the parties have agreed on for the purchase of the property or product.
  • Type of payment: State how the buyer will pay the seller for the product or property. Payment can be in cash, shares, financing, etc.
  • Terms of delivery: Write when and how the seller will supply the product. In the case of a property transaction, it would instead be how and when the seller will transfer property ownership.
  • Closing date for the sale: State the date the parties will come together to close the sale. Closing involves the signing of the document to transfer the property from the seller to the buyer.
  • Definition of terms: Include the definition of the meaning of key terms used in the agreement. Parties may use some terms differently or may want to limit or expand the meaning of certain words. A definition section will help you to do that.
  • Warranties: Detail any warranties that the seller is making in the agreement. A seller in an agreement for the sale of goods may make certain warranties as to the quality of the product. In a real estate transaction, a seller might make warranties on ownership and possession of the property.
  • The deposit amount: Agree on the amount of money the buyer will pay as deposit or earnest money and where it will be held in escrow. The deposit is put in an escrow account pending when parties complete the transaction or if the transaction falls through.
  • Dispute resolution: Decide how parties will resolve any dispute relating to the agreement. Parties can opt for arbitration or mediation.
  • Contingencies: State any conditions that any party must meet before the transaction can be completed. For example, you can provide an inspection contingency that will allow the buyer to back off if, during the inspection, they discover something about the property that they cannot overlook. Other contingencies can be financial, title, or appraisal.
  • Penalty: Agree on the consequences if any party defaults or fails to follow through with the agreement without a valid reason.

Managing a purchase and sale agreement

To manage your agreements efficiently, you need to pay close attention, as the stakes are often high. Various transactions are rarely the same. A purchase and sale agreement is also not the final document, so parties can (and usually will) renegotiate some terms before closing the transaction.

You’ll need to monitor the agreement closely to ensure that parties follow the terms or to discover when you may renegotiate more favorable terms. Often, parties may use an addendum to change the terms of the agreement or to add additional terms.

You can use an addendum to change the closing date, inspection periods, or purchase price. For instance, in a business purchase transaction the buyer might discover that the business is worth a lot less than the price they offered because it has a high employee turnover. The buyer may then decide to continue with the transaction but will offer a lower price. Parties will renegotiate on price and use an addendum to modify the new cost. You may have several addenda to one purchase and sale agreement.

Using contract lifecycle management software to streamline agreements

Managing a purchase and sale agreement is more challenging if your organization does not use a contract lifecycle management (CLM) software in managing your contracts. This type of agreement is unique in that it facilitates a transaction.

Any lack of contract visibility, poor communication between stakeholders, or inefficient tracking of contract key deadlines—which are common in the traditional method of contract management—will adversely affect the outcome. This is why innovative businesses use contract lifecycle management software to manage their purchase and sale agreements, as well as their other business contracts.

Using a contract management software will automate your contract workflows, which will help you create agreements faster, communicate efficiently with both internal and external stakeholders, and stay on top of your obligations and key timelines.

Master purchase and sale agreement with Ironclad CLM

Ironclad’s CLM is an enterprise-grade contract management software designed to handle all contract management lifecycle stages for organizations of all sizes.

With Ironclad’s CLM, you can increase your contracting efficiency by creating templates of workflows for your organization’s purchase and sale agreement. You can save time and resources by using Ironclad’s central platform for creating, approving, revising, editing, negotiating, and redlining your purchase and sale agreement.

Ironclad’s central repository ensures you and your team can have access to and track your purchase and sale agreements without hassle. Our CLM software can also help you create an addendum to your purchase and sale agreement conveniently if it’s needed.

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