What are Sale and Purchase Agreements?
Sale and purchase agreements (SPAs) are legally binding contracts that detail conditions that must be met by buyer and seller. They help to ensure a smooth purchase process and work to protect all parties.
They are commonly used in real estate and business acquisitions. These agreements are also found in transactions for high ticket value items but they may also be used for ongoing and repeat deals. They contain the buyer’s and seller’s details, specifics regarding the negotiation, and deposit and payment schedule.
Sale and purchase agreements can be relatively simple, involving two single parties: the buyer and seller. If a deal affects multiple shareholders, though, the agreement will incorporate multiple parties and can be highly complex.
What is a sale and purchase agreement?
A sale and purchase agreement is also known as a purchase and sale agreement (PSA), P and S agreement, or a purchase and sale contract. It includes the price and payment schedule, as well as details of what is and what is not included in an acquisition, such as the purchase of real estate.
Both parties agree to the terms of the agreement, and it is a legally binding document that can include reparations should one party break the terms of the agreement.
What is included in an SPA?
There is no universal SPA, and every agreement is unique. However, some or all of the following may be included in an agreement:
- Price — The price of the deal should be outlined and specified. This may be in cash terms, but it could also be in the shape of debt, shares, or a combination of these equities.
- Schedule — Most major deals include the provision of deposits and may incorporate milestone payments. These are included in the payment schedule, ensuring that buyer and seller know when the next payment is due.
- Restrictive covenants — In some deals, a restrictive covenant may be required. This can prevent the seller of a business, for example, from setting up the same or a very similar business that would dilute the value of the original deal. A restrictive covenant may prevent the seller from taking customers with them.
- Warranties and indemnities — The seller of a business or asset makes certain warranties regarding the state or condition of the property being sold, such as that a business has no debt. If this statement turns out to be untrue, the asset’s value is reduced. The agreement may state that the seller will indemnify the buyer on a pound-for-pound basis.
- The agreement — Usually the simplest section of the document is the agreement itself. This details all parties and requires their signature, therefore ensuring a legally binding document.
Common uses for SPAs
SPAs are used for large purchases and are commonly included in the acquisition of real estate. They are also used when buying a business or organization. They can also be used for ongoing transactions, such as the monthly acquisition of materials from a supplier. The larger and more complex a deal, the more likely a sale and purchase agreement is used.
The sale and purchase agreement is a legally binding contract and may include details of reparations available if the agreement is broken. Because the SPA is a legally binding document, legal recourse is available if the agreement is broken and, while it is rare, this can include punitive payments.
To summarize, a sale and purchase agreement is a legally binding agreement made between the buyer and seller in an acquisition or purchase deal. This type of agreement is most commonly used in deals with a large transaction value, but it can also be used in revolving deals. It includes details of all parties, payments, and schedule details, as well as warranties and indemnities, and as well as being common in real estate deals, an SPA is commonly used when buying or selling a business.