What is a Purchase and Sales Agreement?

March 20, 2019

Investopedia says, “A Purchase and Sales Agreement (PSA) is a legal contract that obligates a buyer to buy and a seller to sell a product or service. PSAs are found in all types of businesses but are most often associated with real estate deals as a way of finalizing the interests of both parties before closing the deal.”

In other words, a PSA is a legally binding contract that acts as a blueprint, outlining the elements of a deal and ensuring certain protections (like earnest money) for both parties throughout the process. When the agreement is signed by both the buyer and the seller, it signifies both actors are on the same page and intend to move forward with the transaction according to the contract. At Revere, we take PSAs seriously and recommend asset owners do the same.

As far as important paperwork goes, PSAs rank amongst the most critical in the life of a buyer or seller. Common features of a PSA are:

  • Parties to the agreement: This may sound obvious, but it is crucial to delineate who the interested parties in a deal are. Is it a corporation? An individual? Or a jointly owned property? Most traditional agreements that Revere has seen involve people selling property on their own behalf or with a spouse. However, it is not uncommon for certain types of Trusts to look to divest. Either way, being 100% clear about the “who” is the most basic, yet essential element of a PSA.
  • Agreement to sell and purchase: This is the part of the agreement that ensures full legal ownership, often called the title, of the mineral right or royalties for sale will be transferred to the buyer upon satisfaction of the contract. Usually, this is the shortest part of the PSA, but it’s also the backbone. We advise everyone to read this very closely to make sure that the interested purchaser has correctly identified your acreage. We have seen a lot of companies re-trading due to offering on the gross acreage and not the net acreage you hold.
  • Consideration: This is the section that designates how and what the buyer will receive in exchange for the sale of their asset. In mineral and royalties acquisitions, this is often limited to cash but other combinations of shares and or like kind assets have been done. Without this part, the buyer could legally pay you in say, bananas instead of cash. Consideration ensures you get exactly what you signed up for, and the buyer gets exactly what it is they wanted. This is also where any Earnest money payments should be laid out. As we discussed in previous posts, if someone is serious about buying your property they should be serious about putting down some form of earnest.
  • Restrictive Covenants: Again, depending on the kind of deal, a PSA may include restrictions that prevent either party from doing something that would adversely affect the other party, such as selling your asset to another party during a current sale.
  • Warranties and indemnities: Here, the seller is required to give a statement of facts about the condition of the asset being sold. Revere asks that all potential clients represent there are no mortgages, liens, or encumbrances on the property. The sale of the asset is contingent on the said statement being honest and accurate, which prevents the seller from say, entering into an agreement when an asset may not actually be in a state that allows it to be sold. If the asset isn’t in the condition it was claimed to be or agreed upon, the buyer is protected.
  • Conditions precedent/Diligence Period: In a perfect world, sales would be able to close on the same day they opened. However, things like needing to run a quick title check to make sure there are no encumbrances preventing a sale can take days or even weeks to run. Another condition could be that a company needs to obtain approval from a board of directors. In this section of the contract, both parties agree upon a date that all outstanding conditions need to be met by. It also usually assigns who will be responsible for which task, such as running title. If said conditions are not met by the agreed upon date (longstop date), the entire agreement can be dissolved, and or the portion of assets that bears “clean title” can be purchased.
  • Completion: When all of the above criteria are met, the sale becomes complete, and the asset is legally transferred to the buyer using a transfer deed, and the funds to the respective party. Often times a transfer deed can take the form of a Mineral, Mineral and Royalty, Royalty, Warranty, and or Quit Claim Deed depending on the asset and agreement.

When making large sales or purchases, PSAs keep everything on track and protect both parties from financial loss as well as fraud or criminal activity. Even though the sale and purchase may be over, it’s crucial to keep the document somewhere safe and handy, as the considerations, restrictive covenants, warranties, and other conditions often remain relevant long after the deal is officially closed.

Read More Posts