What is Exclusive Right to Purchase Agreement?
In agreements that are not as common, such as an exclusive right to purchase agreement, counterparty should not assume terms and conditions are what they think they are. A counterparty to a contract needs to read the wording of the contract to understand its meaning and effect. This is true with contracts that make up an agreement with a third party, as well as common contract forms and agreements.
The typical real estate sales contract essentially mandates a buyer to purchase the property within the time specified in the agreement. The failure or refusal to do so will grant the seller specific performance if the buyer has the funds available to pay for the purchase. (In the case of a cash deal, there may be other remedies the parties may choose to use including deposit forfeiture and a specific performance action. Specific performance could also be used in a lease or loan transaction . ) A unique agreement that serves as a hybrid between a lease and a sales contract is called an exclusive right to purchase. These agreements are often used in multi-family housing arrangements where the owner allows a tenant to stay in the property for a certain period of time with the option to purchase at the end of a specified time.
An exclusive right to purchase agreement grants the purchaser the ability to buy the property at an established price but does not mandate the sale. Because there is no requirement to buy, this type of contract does not grant a seller the same rights as a regular sales contract. An exclusive right to purchase contract does not give the seller the right to insist on a sale and file suit if the purchaser decides not to purchase the property. Such a suit would need to be brought under a different theory or claims of fraudulent misrepresentation or breach of contract. The sale is treated more like a contract than a condition of ownership.
Key Terms of Exclusive Right to Purchase Agreement
An exclusive right to purchase agreement should be in writing and include the following essential elements:
- (1) Enforceability of exclusivity. The parties should contract for that the real estate broker shall have exclusive right to sell or lease, or that the seller or buyer shall sell or buy through only the real estate broker and that the seller or buyer may not rent, lease, assign or transfer the property without first negotiating with the broker.
- (2) Designating and defining the property subject to the contract. The subject matter of an exclusive right to purchase agreement is the subject property or sale and its designation is required. The statutory method for designating the property is a valid legal description. A constitutional method is a street address. However, of the two, a street address is preferable to a legal description since it immediately identifies the property.
- (3) The compensation agreement. The agreement generally provides that the seller agrees to pay the stated broker’s commission and specifies whether the amount is a flat fee or a percentage of the selling price. It also might specify whether the commission will be based on the gross selling price or net sales proceeds. If the commission is a percentage of the selling price, usually it is between 5 percent and 7 percent. The exclusive right to purchase agreement may provide that the seller agrees to pay the same commission if the property is sold to the buyer with whom the seller contracts as it would have been if the broker had sold the property.
- (4) The time for the buyer and seller to perform. A buyer may be obligated to purchase the property during a specified period or until the buyer finds another property. A seller may be obligated to sell the property upon the buyer paying a specified sum or financing arrangements are made. Generally, the seller is not obligated for a purchase until a contract for sale of the property is signed by the buyer.
The most common form of exclusive right to purchase agreement is an exclusive selling agreement with a real estate broker. Some states may refer to this as an exclusive listing agreement or an exclusive sales agency agreement. An exclusive listing agreement is a contract between a real estate broker and a seller or buyer.
Advantages of Exclusive Right to Purchase Agreement
Buyer Benefits
For the buyer, an exclusive right to purchase agreement establishes a good level of certainty in the event they were to purchase a home in advance of selling their current home. Nothing is worse than getting the lowdown on a great new listing, going to take a look at it because it is a home run, and then discovering that someone else jumped in and snatched it up off the market before you even had a chance to make an offer (and invariably a contingency for the sale of your home). While not fool-proof, an exclusive right to purchase agreement provides the buyer with some protection in this regard.
As a variant on the above point, if the buyer were to receive the offer of a great property that was already on the market and they felt that they wanted to place a bid, they could still do so while also placing an order of purchase on their current home. One would imagine that the seller would be less inclined to engage in a bidding war than they otherwise might be if they did not have the security of an exclusive right to purchase agreement in place.
Seller Benefits
For the seller, the benefit of an exclusive right to purchase agreement is rather straight-forward in that it "gets them out of the kitchen" for a time. If a seller can have a period of time during which he/she does not have to worry about the home being sold, they have some breathing room to take care of matters on their end. For example, particularly in this difficult market, they may have spent an inordinate amount of time and resources on staging the home, sprucing the yard, or attempting to obtain the highest price for the home. If they can avoid an offer on the home for a couple of weeks, it may result in a greater return.
Disadvantages of Exclusive Right to Purchase Agreement
Although an exclusive right to purchase agreement can beneficially streamline the sales process, there are still some potential drawbacks to consider. One such pitfall is that listing agents may personalize the property for the buyer in and of itself. It may be easier than expected to generate a client pool of "looky loos" that might not be the right audience for your property. For example, let’s say you are selling four vacant lots in a wooded, rural location. An agent searching for homes in the area might be surprised to see so many lots together without a home or other buildings. Also, many people who may be interested in buying land outside of the city may not be inclined to work with a particular agent in a one-on-one manner. As such, your exclusive right to purchase agreement may not generate a wide enough audience to get results. If an agent is concerned about the property, they may not understand how to market it properly.
Another downside to a listing agent working with a buyer in a limited capacity could mitigate the relationship with you as the seller. For example, sometimes a seller may be concerned with a buyer that is overly aggressive about negotiating terms. While some of those concerns may be unfounded, an agent might be reluctant to engage on behalf of the buyer and may be more likely to defer to the board. This concern might be overstated. However, it can take the seller off their game when it comes to concessions. An agent may recommend against a sale where the seller and buyer are at odds over the terms of an offer.
Also, be careful what you wish for. Although you may be seeking to exclude one firm from the bidding wars, you may find that the second best offer is too close for comfort. It is very rare to have multiple offers that are equal in all aspects. It is not only price, but also the offer terms themselves that may leave nothing to negotiate except price. In the situation above, the seller may be better off with multiple offers that include offers for a cash sale, an FHA loan, or a VA loan. Although the selling process may take longer, by securing a larger audience, the seller may be better served after all is said and done.
How to Write Exclusive Right to Purchase Agreement
When drafting an exclusive right to purchase agreement, it is essential to consider a number of factors that can help to ensure the document is legally sound. First and foremost, it is recommended that you seek the assistance of a lawyer who is familiar with these types of contracts to help you draft one.
Regardless of how you go about the drafting process, you will want to describe the property in detail so that there is a complete understanding of what may be included in any potential sale. This could include everything from the square footage of the land to whether any appraisal has been made of the land and other details about the surrounding area.
You also need to think carefully about when the timeframe for the exclusive right to purchase will be in effect. It is typically common for these clauses to go for 60 days, but in some cases might go for as long as 90 days. Alternatively, you could negotiate other terms such as a right of first refusal or an exclusivity period.
As is the case with virtually any contract, you’ll want to have a thorough rundown of the payment terms for any potential sale of the property. This typically means providing a breakdown of the financing situations as well as methods of payment, including any necessary down payments . It is also important to provide terms regarding closing costs, whether either party will act as a lender for the buyer, and what would happen if there was a delay in closing.
How should the offer be submitted, and should there be any particular contingencies that must be met? These, too, should be covered within the agreement.
In crafting the document, it may be wise to separate it into two sections: one that discusses the general principles of an exclusive right to purchase, and another that reviews the specific facts and details surrounding the sale and the parties involved. While this makes it easier to read and understand all of the points being made in the agreement, it does not prevent a potential buyer from making one offer and the seller deciding to accept another offer outside of the initial agreement.
When reviewing these agreements, both the buyer and seller should keep an eye out for the following mistakes and red flags:
Don’t overlook the importance of having a clear and comprehensive exclusive right to purchase agreement. Putting in the time and effort necessary to create a quality agreement will help you limit your liability and hassle once the process gets underway.
Legal Background and Jurisdictional Variations
Depending on the jurisdiction, there may be legal issues associated with the exclusive right to purchase agreement. For example, in some jurisdictions, a seller may have the ability to terminate an exclusive right to purchase agreement with notice to an agent after a prescribed period of time.
Even within a single state, different statutes can apply depending on the legal nature of the real estate licensee involved in the transaction. For example, a statutory requirement may exist in a particular state that a broker must disclose all offers and counter offers to the seller or buyer client, even if the broker is working under an exclusive right to purchase agreement. This statutory requirement may trigger a separate legal obligation on the part of the agent to the seller or buyer, and the agent’s oversight of the triggering of the obligation could result in professional liability exposure for failing to do so unless the agent takes action.
Uses and Examples of Exclusive Right to Purchase Agreement
The evolution of any business often starts with a focus on their internal capabilities to deliver their product or service. However, as businesses aim for growth in revenue, employees, or geographic reach, they are often faced with the dilemma of whether or not they have the capability to deliver their offerings consistently and efficiently across all areas of operation. The following are a few common scenarios where an exclusive right to purchase agreement is frequently used. Mergers and Acquisitions / Spinoff Transactions: Many growth strategies for several companies include acquiring, merging, or purchasing divisions of other companies. A common practice in many such transactions is that the parties will often utilize an exclusive right to purchase agreement to enforce the terms of the transaction and facilitate the transfer of assets from one entity to another between the applicable parties. For instance, many healthcare businesses use this type of agreement to control the transfer of their business from one location to another within a specific geographic area and provide for the ongoing development of the acquired business under the management of the new entity. Joint Ventures: Similarly, businesses may wish to consolidate their resources when developing a new product or service. In order to avoid problems between the parties and to prevent them from "stealing" the other party’s business, the they will commonly use an exclusive right to purchase agreement to solidify their rights from any future conflicts, or to ensure that the developed product or service will be provided only by both parties going forward. This process allows parties to develop a unique relationship while allowing them to maintain their own corporate identities. New Product Development: Businesses may also choose to engage in joint ventures or other arrangements with suppliers or manufacturers to facilitate the joint development of a new product offering. Such arrangements often utilize an exclusive right to purchase agreement to guarantee an ongoing commitment between the parties to supply the developed products in the future and for a set price with an option for renewal. This protects both parties from situations where the product and the ability to provide it may be transferred to another party who now has no obligation to the parties’ arrangement. For instance, a builder may enter into this type of arrangement with a specific manufacturer so that the builder can offer a unique product to its clients without worrying about another builder obtaining that same product through the manufacturer after entering into the agreement. Real Estate Development: Similarly, real estate developers will often use an exclusive right to purchase agreement to control the use of a particular piece of real property by controlling the sale of the underlying rights to the property. The parties may also use this type of agreement to prevent real property located near their own developed property from being developed for use by other developers in a fashion that may compete with either of their business interests.
Conclusion
The foregoing is a brief discussion of exclusive right to purchase agreements, what they are and how they can be helpful in making a complex transaction easier . However, as is true with many detailed contracts, the complexity frequently is such that it is in one’s best interest to seek the advice and assistance of an attorney experienced in writing and negotiating these agreements.