What Is a Purchase Agreement?
A purchase agreement is an agreement made between two individuals, or parties, for the exchange of goods and/or services. It is used to legally bind both parties to the committed transaction, and in Illinois, the UCC (Uniform Commercial Code) governs the terms a purchase agreement must meet in order to be enforceable. If sold to the consumer, additional regulations under the federal Magnuson-Moss Warranty Act may apply, which provides consumers certain protections when it comes to warranties and other guarantees.
Generally, a purchase agreement is used when a transaction is not strictly a sale. An example of a purchase agreement is when a landlord rents out an apartment. In this case, the landlord is selling an apartment unit to a tenant for a particular rental period. Alternatively , purchase agreements are commonly used for sales of real estate, in which case it is called a purchase and sale agreement, or simply sales agreement. Typically, the seller of real estate provides a deed to the buyer of the property, the deed of conveyance being a tool that ensures the transfer of the property title. The deed does not make the contract contractually enforceable, however; only the purchase agreement can do that.
As is the case with any contract, the terms of a purchase agreement should accurately reflect the intent of the parties, and the resulting gains or exchanges made in the transaction should satisfy the parties. Thus, although it is possible for a purchase agreement to be for the exchange of services or even the nonexchange of anything, most purchase agreements involve some sort of sale of goods.
Bill of Sale Basics
A bill of sale is primarily used for the transfer of personal property, like furniture, crops, equipment, or electronics. It’s basically a receipt which establishes that a sale has taken place. It format is similar to that of a purchase agreement, but its purpose is different. For instance, it won’t provide you with the peace of mind a dedicated purchase agreement does, but it will protect you from ambiguity and liability.
Using a bill of sale when transferring ownership of property is a quick way to engage in a sale. In many situations, you simply hand over your goods and sign the bill of sale, but you may be asked to provide other documents such as receipts, title, and/or registration. A bill of sale will include information about the seller, the buyer, and a description of the property being transferred. This may be used when buying or selling property that is not real estate, meaning it’s typically reserved for personal property that is not real estate.
The Differences Between a Purchase Agreement and a Bill of Sale
A purchase agreement is a more formal contract that establishes a sale, whether of a business or a specific item, usually for a set amount of money. It’s a legally binding contract. Both buyer and seller sign it as a way of codifying the transaction and establishing who or what is being sold, by whom and for how much. In most cases, unless both parties agree to the contrary, a purchase agreement will immediately establish the transfer of ownership of whatever is being sold. A bill of sale is a simple receipt or record that shows a transaction between the two parties. It also serves as a record of a transfer of title from one person to another. Use of a bill of sale, however, doesn’t necessarily mean the transfer of ownership is taking place immediately. The bill of sale could stand in as a promissory note or "promise to pay," so there could be a comprehensive purchase agreement already in place between the two parties that detail the payment schedule over a period of time.
It’s possible the two parties agree to execute a purchase agreement or promissory note and execute the bill of sale at a later date, at which point the transaction would be established.
When to Use a Purchase Agreement
A purchase agreement is used in any situation in which the buyer and seller are interested in protecting their respective interests and are engaged in a more complex commercial transaction. For example, suppose you are purchasing a business, but the seller insists on receiving a portion of the purchase price over a period of time. A purchase agreement will undoubtedly be necessary to document the disclosure of information, the agreement between the parties, and the obligations of each party . Likewise, if you are selling an item of personal property, but the buyer is delaying payment in favor of "playing the field," a purchase agreement will help protect you from loss and ensure your item is properly paid for.
For someone buying real estate, a purchase agreement is usually essential in protecting their interest. Most deeds transferring real property will only contain boilerplate language generally indicating that one party is conveying property to another. However, when real property is transferred, rights and obligations change hands as well. A purchase agreement provides a place to ask questions and negotiate the deal so that everyone is satisfied with the outcome.
When to Use a Bill of Sale
In some cases, a bill of sale is the preferred document for transferring ownership. Small-value and personal items, in particular, may not require full purchase agreement documentation. However, the type of transaction may dictate which document is more appropriate. If the seller retains a security interest in the item, then a financing statement (UCC-1) should actually be used instead of a purchase agreement or a bill of sale. Also, if the seller is an out-of-state business that is selling personal property in your state, then no bill of sale or other document is needed.
A bill of sale may also be suitable if a specific purchase agreement is used to make the sale but sales tax is not required. In these situations, a seller can create a bill of sale to show the transfer of ownership and to confirm that no sales tax is owed. This avoids the extra step of having to file a UCC-1 financing statement or purchase agreement.
Bill of sales are generally appropriate when the following applies: Legally speaking, a bill of sale primary purpose is to serve as proof of a transfer of ownership and to provide a record of the details of the transaction, including the terms. On the other hand, purchase agreements are generally more suitable when formal transfer of a much higher-value item is involved.
Legal Requirements and Considerations
Purchase agreements and bills of sale must both serve a purpose in the law to be legally valid. They also both require signatures from both parties as well as legally acceptable consideration – something of value – to seal the deal. In exchange for money, the seller relinquishes ownership or rights in the property, and the buyer receives ownership or rights to the property. The most important difference in terms of legal requirements for a purchase agreement and bill of sale come about if the property being bought or sold is real estate: in this case, the deed must be signed and delivered for consideration in addition to the purchase agreement. Otherwise, a purchase agreement alone does not provide for valid ownership transfer.
In some states, a bill of sale is required to provide a defense against future claims to a property, especially for motor vehicles. If a buyer has a bill of sale in their possession for a vehicle, the court will assume that they own it if the seller later attempts to reclaim the vehicle, assuming all the other legal requirements have been met for transferring ownership . Other than that specific use for motor vehicle sales and purchases, a bill of sale is often not necessary when a purchase agreement is already in place. When buyer and seller agree to it, a bill of sale can be used as a convenient way to complete the sale. The law requires a seller to provide a bill of sale in writing and preferably signed by the buyer and seller. Simply saying "I sold my motorcycle to Crystal" is not sufficient. A bill of sale for a motorcycle must be written out, signed and include the date of sale. It also must have details such as the serial number of the motorcycle and its make and model. Analogous examples exist for vehicle, boat and plane sales as well. As with all real estate now, a purchase agreement is required in all states for transfers of real property. This is not an encouragement to forgo the additional deed, which is necessary to actually effect the meaningful and legally viable transfer of the transaction.