Negotiating a Commercial Agreement – Do I Need a Lawyer?

By: Jayson Schwarz LLM and Konstantine Chatzidimos

Anyone who has purchased an existing business can appreciate the financial risks associated with such a venture: start-up outlays of capital can be significant, Banks want personal guarantees most of the time and personal assets often need be mortgaged to finance the new business. Given the significant degree of risk and uncertainty which cannot be controlled, it is advisable to seize your only opportunity to manage the risk which can be controlled.  By this I mean the negotiation and drafting of an effective Agreement of Purchase and Sale (“APS”).  Sadly, many purchasers blindly rely on only the standard boiler-plate provisions of the OREA (Ontario Real Estate Assoc.) form of agreement to protect their interests and retain a commercial solicitor only when the deal is firm.  This is poor decision-making and exposes you to large potential risk.While the OREA form does address many key issues, it does so in a largely cursory manner, often lacking the detail required to adequately safeguard your interests.  Only a lawyer will consider many of the other matters that need to be included in your APS.

Here is a sample list of items that could be considered in an APS. Although this list is not intended to be comprehensive it shows how vital the right advice is in order to protect yourself. You should always see a lawyer before signing an APS.

• Amount of cash flow generated by the property – How do I make sure it is what they say it is?
• Level of expenditure on property maintenance, management and taxes needed to sustain that cash flow over time – How can I ensure the numbers are right and will be maintained or not increase?
• Quality of the lease documents in place supporting that cash flow and the availability of statements from the tenants (called “estoppel certificates”) to confirm that there are no potential expenses, claims or liabilities pending;
• Whether the permitted uses for the property, under applicable zoning by-laws, are flexible enough to allow adaptability in the type of tenants attracted in the future without a change in the zoning being required;
• Whether the property complies with all applicable environmental laws and regulations or whether there are any prospective costs of environmental clean-up – What searches do I need? How long to do them? What happens if the results are bad?
• The quality of existing building management if to be assumed as well as future issues relating to the management of the property and what about employees if any? and,
• The existence of any service contracts for elevator maintenance, roof maintenance, security systems, etc., and the ability to both assume or terminate such service contracts and re-tender them to better operators on short notice as of the closing date of the purchase.
• Tax exposure – provincial or federal, municipal requirements – Are the taxes paid?

These are but a few of the issues which must be addressed in the Agreement of Purchase and Sale and which will affect the content of the promises or “covenants” contained in the document.  As you can ascertain, a properly drafted Agreement serves to mitigate and manage the inherent risks, provided the Agreement allows for full disclosure and investigation, anticipates pre-closing risks and assigns rights and responsibilities appropriately.

In conclusion, the purchase or sale of a business or commercial property is a complex process, fraught with danger if you are not adequately protected. Real estate agents, bankers and brokers do not have the same obligations to you or knowledge available to protect you and structure your deal in the most advantageous and safest way for your benefit as a lawyer does. A good lawyer can quickly become the best investment you can make.