Key Terms That Confirm the Shortcoming of AIR Forms

By Mark Ellinghouse

There are not many things in life that are truly “one size fits all.” We certainly don’t take this approach when it comes to our clothes, our TV shows, or our lunches. Yet for some reason, we regularly employ this method in our commercial real estate transactions. Almost daily, I am asked to comment on an AIR or CAR form, usually with the caveat that one of the parties really wants to use the form and “keep it simple.” While simplicity may have its benefits, this is rarely the wisest course of action in a transaction involving multi-million-dollar assets. A custom form will more accurately reflect the parties’ agreement and, in my experience, actually be cheaper and easier for the parties to negotiate.

Despite my efforts to emphasize the risks of using the AIR forms, clients still insist on using them. Thus, I thought it would be helpful to provide some concrete examples of why the AIR purchase and sale agreement form is inadequate for most commercial real estate transactions from both the buyer and seller perspectives. This list is not exhaustive, but is hopefully broad enough to emphasize the importance of a custom form for almost every deal.

For the Buyer:

  • The definition of the “Property” is inadequate. What is included in this definition? Does the Buyer receive the benefit of guaranties and warranties applicable to the improvements? Do entitlements, permits, licenses and approvals automatically pass to the Buyer? The AIR form does not address these items, which may have a material economic effect on the transaction.
  • There is no process for a full title review. Under the AIR form, the Buyer is entitled to obtain a title commitment and “satisfy itself with regard to the condition of title.” Most parties anticipate a process by which the Buyer can object to certain conditions of title, the Seller responds to indicate whether it will remove those items, and then the Buyer can decide whether to proceed with the transaction and waive its title contingency. This process is not well explained in the AIR form, and may cause confusion as to how title issues will be resolved. 
  • The remedy for Seller default does not make the Buyer whole. Under the AIR form, the Buyer can proceed with a transaction and complete expensive due diligence only for the Seller to change its mind (or receive a better offer) and refuse to sell. While the form contemplates the Buyer’s ability to terminate and receive a return of its deposit, the Buyer will have lost its due diligence costs without a clear right of reimbursement. 
  • The Seller’s representations and warranties do not protect the Buyer. These terms provide reasonable assurances to the Buyer that issues that cannot easily be discovered in due diligence do not apply to the property. The AIR form provides some representations and warranties, but the list is insufficient to provide the Buyer with reasonable assurances of the quality of the property.

For the Seller:

  • Seller’s disclosure obligations are excessive. The AIR form requires the Seller to complete a mandatory disclosure statement and a property information sheet. These forms cover far more issues than is fair or reasonable in a commercial transaction, and will increase the risk that a Buyer will bring a “failure to disclose” claim against the Seller despite the Seller’s diligent efforts to provide adequate due diligence materials.
  • Seller’s representations and warranties survive for too long. After a transaction closes, typically the only grounds for a Buyer to bring a claim against the Seller is through a breach of Seller’s representations and warranties. These terms “survive” the closing. In today’s market, the survival period should be somewhere between 6-18 months. In the AIR form, these provisions survive for three years, meaning the Seller remains potentially liable to the Buyer for a far longer period than is reasonable or market.
  • Seller’s liability is greater than market. Transactions in today’s economic environment often feature a limitation on the maximum liability for which a Seller can be responsible after the closing (typically some percentage of the purchase price). No such limitation is included in the AIR form, meaning a Seller could face a claim with liability exposure far greater than necessary.
  • There is no “as-is” provision or release. If the Buyer is satisfied with its due diligence and elects to close, the Seller should be released from all claims relating to the property except for the specific representations and warranties that are made by the Seller. Otherwise, a Seller could end up providing a de facto continuing warranty regarding all of the conditions of the property despite the Buyer’s election to waive and approve due diligence. This is not typical or fair to the Seller.
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Meet the Author: Mark Ellinghouse
Mark Ellinghouse 916-558-6091

I assist clients with commercial real estate matters, including buying, selling, leasing, and management of real property. I also help clients structure investments in real estate, handling projects relating to financing, investment, and joint ventures.

In addition, I regularly advise clients on general corporate matters, from formation and management to operating issues to third party contracts for licensing, research and development. I have a diverse background, with experience in private practice and in-house counsel, on both litigation and transactional cases, and in non-legal roles. I like working with sophisticated clients who demand top notch legal advice to help them manage their legal issues in an efficient and effective manner.

I look forward to working and/or connecting with you soon. 
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