What Is a Sales and Purchase Agreement (SPA)?
A sales and purchase agreement (SPA) is a binding legal contract between two parties that obligates a transaction between a buyer and seller. SPAs are typically used for real estate transactions but are found in other business areas. The agreement finalizes the terms and conditions of the sale, and it is the culmination of negotiations between the buyer and the seller.
Understanding a Sales and Purchase Agreement (SPA)
The price of the item to be sold and the transaction terms are negotiated between the buyer and the seller before any transaction occurs. A framework for the negotiating process is the SPA. The SPA is often used when making significant purchases, like buying real estate or making repeated purchases over time.
The SPA is a legally binding agreement between the parties after it is signed. In most cases, an impartial third party will draft and supervise the SPA to speed up the conclusion of the transaction. The agreement also specifies the date of the last sale.
What’s in an SPA
One SPA may include a significant amount of material depending on the transaction size. These are a few examples of what you could find at an SPA.
Identification of Assets
The particular asset that is being sold is described in an SPA. Real estate has a physical location determined by its address and parcel number. This segment is less reliable when selling readily interchangeable duplicates, which could be more.
Purchase Price and Terms
An SPA specifies the exchange rate for the transaction. The agreement also specifies how the upfront deposit will be made and what percentage of the selling price is required as a deposit. The agreement also specifies in this section how the remaining balance—that is, the total purchase price minus the deposit—will be paid.
PSA or SPA?
One may alternatively refer to a “sale and purchase agreement” as a “purchase and sale agreement.” A PSA and an SPA are precisely the same thing in this context.
Exercise Due Care
More extensive asset sales sometimes include a clause in the SPA requiring the buyer to attest to having done their due diligence throughout the transaction. Additional due diligence periods needing more deposits or upfront fees may be specified in the PSA.
Indemnity agreements and the buyer’s acknowledgment of the assets’ situation are probably included in this part. Additionally, the buyer often attests to their ability to back out of the agreement under certain situations. Finally, this section can clarify which members of the buyer’s team are authorized to speak on the company’s behalf.
Conditions/Covenants Before Closing
Typically, an SPA delineates the subsequent activities in the transactions. For the sale to be enforceable, these terms and conditions must be met; any failure to do so or to act by them constitutes a violation of the agreement. In certain situations, the buyer may be able to back out of the deal (assuming they are included in the previous section).
A large number of these covenants deal with asset protection and risk reduction. This section usually describes the steps a seller has to take if unanticipated litigation affects the transaction. It also specifies what warranties will remain in effect after the asset is sold, what insurance requirements should be met and attests to the asset’s exclusivity.
Remedies/Damages
In some situations, it could be necessary to communicate what will happen to each party if the item being sold is destroyed before sale or during transportation. Various damage levels, such as light damage and heavy damage, are often defined in this section. The contract then lists many ways to address each degree of harm.
Additional Sections
An SPA may have additional parts, if any. Title and survey details are often included in real estate transactions. Wording on present renters or the facility’s state may be included in specific covenants and conditions.
A SPA often lists the relevant broker commissions. A SPA specifies the amount to be paid, who pays commissions, how those payments will be made, and when they should be made.
Length of SPA
A single or hundreds of pages with several supporting exhibits might make up an SPA. An SPA’s objective is to provide all pertinent terms and conditions. Should there be few, the text can be brief; if many, be prepared to read a lot.
An SPA describes the terms of an agreement for transactions that need to be kept private. This covers clauses about press releases and public announcements, the use of promotional materials mentioning the sale, and the remedies available if one party violates this portion of the agreement.
Should the sale depend on other agreements, a separation agreement (SPA) will specify how any sale will be terminated if the other agreement collapses. Consider a scenario where a real estate developer tries to buy two adjacent properties and plans to destroy both to construct a single structure. One SPA may include wording from the developer, making the contract reliant on the other SPA’s execution.
Instances of SPAs in the Industry
Real estate transactions are the setting for one of the most frequent SPAs. The parties agree on a final sales price during the negotiating phase. In addition, other pertinent data are mentioned, including a closing date or contingencies.
Big, publicly listed corporations employ SPAs in their supply networks. An SPA might be employed when procuring a substantial quantity of materials from a supplier or making a single, large-scale purchase. For instance, a business and a supplier might sign an SPA to purchase a certain amount of goods at a predetermined cost.
An SPA can also serve as an agreement for revolving purchases, like a monthly supply of inventory, raw materials, or other tangible goods. Even if the delivery is scheduled later or dispersed over time, the purchase or selling price may be agreed upon in advance. SPAs are designed to assist buyers and sellers in projecting costs and demand, and their importance grows with the size of the transaction.
As a further example, an SPA is often used when one company buys another. A company may sell its physical assets to a buyer under the terms of the SPA without having to sell the name rights to the firm since it details the precise nature of what is being purchased and sold.
A Sales and Purchase Agreement: What Is It?
A legally enforceable contract that binds both the seller and the buyer to the conditions of a transaction is known as a sales and purchase agreement. Both parties must sign the SPA containing the exchange’s terms and conditions.
Is a Sales and Purchase Agreement Required?
An SPA shields both the supplier and the consumer in a commodities trade. Although a SPA is not legally necessary, setting up terms and conditions in a formal contract before the transaction occurs is an excellent idea. With a contract in place, you often will have a legal remedy for a failed transaction.
Do SPAs Have Legal Force?
Yes, SPAs are legally binding. Often, the final document given as part of the acquisition or sale of an asset is signed by authorized representatives from both parties when both sides are prepared to complete the agreement.
Conclusion
- A sales and purchase agreement (SPA) is a binding legal contract that obligates a customer to buy and a seller to sell a product or service.
- SPAs are commonly utilized in real estate agreements or when two parties are trading a significant item or many things.
- A SPA provides vital information like the asset, sales price, and payment conditions of the transaction.
- A SPA also describes the terms for due diligence, prerequisites to the sale, and legal remedies if the product is harmed before the sale.
- Wording about broker commissions, contingent sales, and confidentiality may be found in a SPA.
