How to Draft the Perfect Purchase Agreement
Nov 1st, 2023
Do you know how to draft a legally binding purchase agreement? A purchase agreement must contain several essential components to protect both the buyer and seller. You need to know what needs to be included in your next purchase agreement to make it legally binding and protect your interests.
In this article, you’ll learn the components of an ideal purchase agreement. Use the attached template to create your next purchase agreement.
- A purchase agreement outlines the legal responsibilities of buyers and sellers.
- Every purchase agreement should include buyer and seller names, transaction date, the item being purchased, and the purchase price and terms.
- A purchase agreement should detail inclusions and exclusions, contingencies, disclosures, and representations and warranties.
- The purchase agreement must detail how any potential disputes should be resolved.
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What Exactly Is a Purchase Agreement?
A purchase agreement is a contract that details the legal responsibilities of parties involved in buying and selling an item or services. Commonly used in real estate, they can also be used for the purchase of goods of other types, especially high-value items.
A purchase agreement reflects the negotiated terms and conditions of the purchase, making it legally binding. The specific clauses in a purchase agreement will differ depending on the item sold and the conditions negotiated by each party. Therefore, the agreement should address issues specific to that transaction.
That said, a purchase agreement should detail the following:
- Involved parties
- Description of the asset being sold
- How liabilities associated with the asset should be distributed between the parties
- Any warranties or guarantees for the item being purchased
- The purchase price and payment terms
The two parties should fully understand and agree to all the terms and conditions outlined in the purchase agreement. Both parties must sign the purchase agreement for it to be legally binding.
What Are the Key Components of a Purchase Agreement?
Even though every purchase agreement is unique to the item being purchased, all should contain several essential components. These components, and the language describing them, clarify the details of the contract for both parties.
Buyer and Seller Names and Information
The first thing to include in a purchase agreement are the full names of the buyer(s) and seller(s). The agreement should also include contact information (street address, city, state, and ZIP code) for all parties. Use legal first and last names for individuals and official company names for businesses or entities.
Date of the Transaction
The purchase agreement should include the effective date of the transaction, which may differ from the date(s) the agreement is signed. Purchase agreements often take effect several days or weeks after the contract is executed via signature.
The purchase agreement needs to detail the item being purchased. If the purchase agreement is for a piece of property, include the property’s address. For a piece of equipment, include the item’s model number, serial number (if available), and a brief description of the item.
Purchase Price and Terms
The purchase agreement needs to include the final purchase price, usually pre-tax. If taxable, the agreement should spell out which party (typically the purchaser) is responsible for paying the tax.
Also, detail the terms of payment, such as the acceptable payment methods (cash, credit, etc.) and schedules. For example, an agreement might spell out that the buyer pays a certain amount or percentage upon signing, with the balance due in one or more payments on specified dates.
Inclusions and Exclusions
Depending on the type of asset being sold, a purchase agreement might list inclusions and exclusions. In real estate, this could mean appliances and light fixtures, as well as items excluded from the purchase, such as furniture and yard care equipment. The point is to be clear about what exactly is being sold and what isn’t.
Some purchase agreements hinge on specific conditions or actions performed by one or both of the parties. In real estate transactions, the deal may depend on a successful home inspection or property appraisal. Others may require the seller to provide legal documentation of ownership.
A purchase agreement should disclose any information from the seller that could affect the buyer after the purchase. For example, sellers should include any known defects in a piece of heavy equipment or known hazards associated with a piece of property. This protects the seller if the buyer faces issues at a later date.
Sellers should also disclose any otherwise hidden obligations tied to the item being sold. For example, a business purchase agreement should disclose long-term financial obligations, such as loans or employee benefit plans.
Representations and Warranties
Both parties to a purchase agreement need to state that they officially represent any companies or other entities involved in the transaction. The buyer must show legal ownership, and the seller should verify their financial capacity for agreed-upon payments. Both must represent the accuracy and completeness of the information included and full compliance with any applicable laws and regulations. Any warranties on the item being sold should also be detailed.
Disputes and Remedies
The purchase agreement should outline what happens if either party defaults. It should detail remedies if there is a breach of contract or misrepresentation of the item being sold. These may include negotiation, mediation, arbitration, or litigation.
A purchase agreement can include more information than that previously mentioned. There may be clauses for assignments and delegations, amendments and modifications, and severability. In short, anything you think might be an issue should be spelled out in the purchase agreement.
No purchase agreement is legal until it is signed and dated by official representatives of both parties. Any involved third parties, such as real estate agents or brokers, should also sign as appropriate. Signatures can be either physical or, in the case of digital contacts, electronic (e-signatures).
SOURCE: Carosella & Associates via YouTube
Use This Template for Your Next Purchase Agreement
When you need to create a new purchase agreement, use this purchase agreement template and fill in the blanks as necessary.
This Purchase Agreement (“Agreement”) is entered into on the ______ day of _______________, 20______, (“Effective Date”) by:
Seller (“Seller”) ________________________, located at ________________________________________ and
Buyer (“Buyer”) ________________________, located at ________________________________________ and
Hereinafter, the Seller and Buyer may be referred to individually as a “Party” and collectively as the “Parties.”
The Parties agree as follows:
- Sale of Asset/Property. Seller agrees to sell, and Buyer agrees to purchase the personal property described below (“Property”): ____________________________________________________________________________________
- Date of Sale. The Buyer is entitled to take possession of the Property on ____________________ (“Effective Date”). If delivery occurs after the Effective Date, the Seller must ensure the Property remains in the condition last inspected by Buyer.
- Purchase Price. Buyer will pay Seller for the Property and for all obligations specified in this Agreement, if any, as the full and complete purchase price, including any applicable sales tax, the sum of $_________________ (“Purchase Price”).
- Payment Terms. Payment of the Purchase Price will be made by Buyer to Seller according to the following schedule: ____________________________________________________________________________________
- Inclusions. The sale of Property will include the following items: __________________________________________________________
- Exclusions. The sale of Property does not include the following items: __________________________________________________
- Contingencies. The sale of Property is contingent upon the following conditions: ____________________________________________________________
- Disclosures. The Seller discloses the following conditions that may affect the use and/or value of the Property: ________________________________________________________
- Seller’s Representations and Warranties. Seller represents and warrants that they have good and marketable title to the Property and full authority to sell the Property. Seller also represents that the Property is sold free and clear of all liens, indebtedness, or liabilities.
- Warranties. Seller makes no warranties concerning the Property, which is being sold and assigned “as is.” Seller expressly disclaims any representations or warranties as to the value, condition, or functionality of the Property or its suitability for any particular purpose.
- Disputes and Remedies. Any dispute arising from this Agreement shall be resolved through [CHOOSE ONE] binding arbitration/mediation/court litigation.
- Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of _________________.
IN WITNESS WHEREOF, the Parties have entered into this Agreement as of the Effective Date.
Seller Signature _________________ Seller Full Name_________________
Buyer Signature _________________ Buyer Full Name _________________
How to Use Contract Logix to Draft and Manage Your Purchase Agreements
If you only engage in occasional purchase agreements, manually drafting the agreement may suffice. However, if your company executes multiple agreements, either as a buyer or seller (or both), the manual process can be arduous and legally risky.
Consider using contract management software like Contract Logix. This automates the creation of your purchase agreements. By basing new agreements on pre-approved legal language and templates, your purchase agreements are standardized and optimized. By agreeing to certain terms and clauses in advance, you also reduce your legal risk.
Contract Logix offers a holistic approach to contract management. It helps manage the entire contract process, including deliverables and payments post-execution. All your contracts, including purchase agreements, are stored in a centralized digital repository, which makes it easy to locate key information when you need it. It’s an efficient way to manage all your purchase agreements.
Contact Contract Logix to learn more about purchase agreements.
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