Purchase and sale agreement (PSA) is the binding contract that governs the sale of a commercial property. It fixes the purchase price, closing date, and the parties, and sets out representations, warranties, contingencies, the earnest money deposit, and remedies for breach. It controls the deal from execution through closing.
What Is a Purchase and Sale Agreement in Commercial Real Estate?
A purchase and sale agreement in commercial real estate is the fully binding contract that replaces the non-binding letter of intent and governs the transaction to closing. According to Thomson Reuters, its four threshold provisions are the identity of buyer and seller, the property description, the purchase price, and the closing date.
Every other clause hangs off those four. The PSA then defines the earnest money deposit, the due diligence and contingency periods, the representations and warranties each side gives, indemnification, title and survey review, prorations at closing, and the remedies if either party defaults. Per Thomson Reuters, representations and warranties are typically the most heavily negotiated section, because they set the facts each party relied on and create the basis for later claims.
PSA section | What it governs |
Parties and property | Legal names of buyer and seller, legal description of the asset |
Purchase price and deposit | Total price, earnest money amount, and escrow terms |
Due diligence period | Timeframe to investigate title, environmental, physical, and financial condition |
Contingencies | Conditions such as financing and inspection that let the buyer exit |
Representations and warranties | Facts each party affirms, and the basis for post-closing claims |
Closing and prorations | Closing date, deliveries, and allocation of taxes, rent, and expenses |
Remedies | What each party may recover if the other defaults |
The PSA is the document lawyers draft after the letter of intent is signed. It converts the tentative economics of the LOI into enforceable obligations.
Why the Purchase and Sale Agreement Matters
The purchase and sale agreement matters because it is the instrument that binds the deal: once executed, neither party can walk away without triggering the remedies written into it. It allocates risk between buyer and seller and sets every deadline, so a poorly drafted PSA costs the party who overlooked a clause.
The document decides who bears which risk. Representations and warranties shift the risk that the property is not what the seller described. The contingency and due diligence provisions decide whether the buyer can exit and recover its deposit. The remedies section, often making the earnest money the seller's liquidated damages, decides what a walkaway costs. Per Thomson Reuters, the buyer's right to a deposit refund on termination during due diligence is usually written directly into the PSA.
The quotable point for an operator: the letter of intent is where you agree to the deal, but the purchase and sale agreement is where you live with it, because every deadline and every remedy is enforceable from the moment both sides sign.
Example
A buyer and seller execute a PSA for an industrial building at a $6,000,000 purchase price. The PSA sets a 2% earnest money deposit, a 45-day due diligence period, a financing contingency, and a 30-day close after due diligence expires. Each figure becomes an enforceable term.
PSA term | Agreed figure | Effect |
Purchase price | $6,000,000 | Total consideration |
Earnest money deposit | 2% | 0.02 x $6,000,000 = $120,000 in escrow |
Due diligence period | 45 days | Buyer may terminate and recover the deposit |
Financing contingency | Included | Buyer may exit if the loan is not approved |
Closing | 30 days after due diligence | Roughly day 75 from execution |
The deposit is 0.02 multiplied by $6,000,000, which equals $120,000, held in escrow. If the buyer terminates within the 45-day due diligence window, the PSA returns the $120,000. If the buyer defaults after contingencies clear, the remedies section typically lets the seller keep the $120,000 as liquidated damages. The timeline runs about 75 days from execution to close: 45 days of due diligence plus a 30-day close.
Variations and Edge Cases
A purchase and sale agreement is not a fixed template: its clauses shift with asset type, deal size, and which side holds leverage. A single-tenant net lease sale turns on estoppel and lease review, while a value-add multifamily sale turns on physical and environmental due diligence. The table covers common variants.
Variant | Treatment |
As-is sale | Seller gives limited representations; buyer relies on its own due diligence |
Financing contingency present | Buyer may terminate if the loan is not secured on stated terms |
No financing contingency | Cash or waived-financing deal; buyer bears loan risk |
Assignment permitted | Buyer may assign the PSA to an affiliate or partner before closing |
Deposit non-refundable after due diligence | Deposit goes hard once contingencies expire |
The most common mistake is treating the PSA as a formality after the LOI. The LOI is non-binding, but the PSA is not: every open point the LOI left vague is negotiated again in the PSA, and once signed it controls.
Purchase and Sale Agreement vs Letter of Intent
Purchase and sale agreement is often confused with the letter of intent, and both record deal terms, but they differ in force. A letter of intent is a generally non-binding term sheet that outlines proposed economics. A purchase and sale agreement is the fully binding contract, executed by both parties, that governs the transaction and is enforceable in court.
The LOI comes first and shapes the PSA; the PSA comes second and controls. The LOI can be walked away from with few consequences outside its binding clauses. The signed PSA cannot: it creates enforceable price, deadline, and default obligations, and it makes the earnest money deposit real money at risk.
Frequently Asked Questions
What is a purchase and sale agreement in commercial real estate?A purchase and sale agreement is the binding contract that governs the sale of a commercial property. It fixes the purchase price, closing date, and parties, and sets out the earnest money deposit, due diligence and contingency periods, representations and warranties, and the remedies if either side defaults.
What is the difference between a PSA and a letter of intent?A letter of intent is a generally non-binding term sheet that outlines proposed economics, while a purchase and sale agreement is the fully binding contract that governs the deal to closing. The LOI comes first and shapes the PSA, but the PSA controls and is enforceable in court.
What are the key clauses in a purchase and sale agreement?The key clauses in a purchase and sale agreement are the parties and property description, purchase price and earnest money deposit, due diligence and contingency periods, representations and warranties, title and survey review, closing and prorations, and remedies for default.
Related Terms
Letter of Intent
Earnest Money Deposit
Contingency Period
Due Diligence
Estoppel Certificate