By Jones Osborn II

Commercial property is often bought or sold by using a pre-printed form called a Real Estate Purchase Contract and Receipt for Deposit. This form is usually provided by the Arizona Association of Realtors or some other trade organization which supplies the forms to real estate brokers.

So what's wrong with using the "standard form"? It certainly sounds like the fairest and most economical way to do business.

Actually, nothing is inherently wrong with the form. However, do not assume that the form necessarily represents the customary practice, or that it embodies terms that are fair or appropriate for the particular deal. The reason is simple—in commercial real estate, almost nothing is "standard." Commercial real estate transactions are individually negotiated according to the needs, desires, and relative bargaining positions of the parties. The printed "standard form" may or may not be appropriate for any given transaction.

Specific Provisions. There are a number of considerations that the parties should carefully think through before automatically using a form—and if the form is not suitable, it should either be changed by attaching an addendum, or a new contract should be drafted from scratch.

Among the terms that should be reviewed most closely are the provisions concerning representations and warranties. The form typically provides that the seller will disclose all latent or hidden defects, that the roof does not leak, and that all equipment will be in good working order at close of escrow. Other than that, the buyer agrees to take the property "as is." There is certainly nothing wrong with buying or selling property "as is," without representation or warranty. However, it is rarely in the buyer's best interest. There are a number of important matters that buyers frequently want or need protection against, including the condition of the property, whether lawsuits involving the property are pending or are threatened, whether the seller is aware of any contamination or other illegal conditions at the property, whether the property is under threat of condemnation, and so on. Therefore, if the buyer has decent bargaining power he will normally attempt to negotiate certain representations and warranties so that he will be assured he is getting what he is paying for and that he is not buying somebody else's problem.

Another area that deserves review is the condition of title. The printed form will usually state that the buyer agrees in advance to take the property subject to any existing covenants, conditions, and restrictions, utility easements, rights of tenants in possession, and various other matters. Sometimes such matters do not cause a problem, but in other cases they can cause very serious problems. Therefore, the buyer is better protected by reserving the right to review and approve the title report and all matters of record. That gives the buyer a chance to cancel if any of these matters turn out to be a problem—for example, if there is a utility easement where the buyer wants to build a building, or if there is a deed restriction against the kind of use intended by the buyer. It can be very risky to agree to purchase property without a chance to review and approve all matters that have been recorded against the property, and this is a serious shortcoming of the printed form, at least for the buyer.

The forms usually provide that any improvement district assessments are to be paid in full by the seller. There is nothing inherently wrong with this, but it should not be considered to be the customary or standard practice. This term is a negotiated one that varies from deal to deal, and if you are a seller it is clearly to your advantage to negotiate a contract that prorates assessments.

The standard form provides that the seller can either sue for specific performance or damages or forfeit the earnest money deposit in the event the buyer does not perform. The buyer, however, usually finds it in his best interests to limit the seller's remedy to the forfeiture of the deposit, which is a fairly customary provision. This is another area where the form may not necessarily represent either the prevailing practice or the desire of at least one of the parties.

The forms provide that a defaulting party must be given 13 days notice before action may be taken to enforce the contract. This may be an appropriate term in many situations, but very often a seller will want to be able to terminate the contract immediately if the buyer does not perform. Again, the form may not comply with the desires of at least one of the parties on an important issue.

Finally, there are often many important terms appropriate to the particular deal that are not mentioned at all in the standard form, such as restrictions on further leases during the escrow period, the necessity for estoppel certificates, contingency or inspection periods, the right to participate in a tax-deferred exchange, and so on. Therefore, when reviewing a form, one should not only focus on the terms and provisions contained in the contract; he should also think long and hard about what should be in the contract, but isn't.

Conclusion. This memo is not intended to provide an exhaustive list of shortcomings or to be a general indictment of the so-called "standard form." It is simply an effort to point out that these forms do not necessarily represent the prevailing custom in many areas because there is no prevailing custom, and that every deal is different. The forms are often an excellent starting point, but they should never be signed without a close and critical reading to make sure that they are appropriate for the particular transaction and adequately protect your own interests. And, of course, we would encourage you to seek legal counsel before you sign if you have any questions or concerns.