Purchase Agreement

Purchase agreements apply in real estate, business acquisitions, and the sale of personal property. Once signed, the agreement creates enforceable obligations on both parties. If either party fails to perform, the other may have legal remedies under contract law.

How a purchase agreement works

A purchase agreement takes effect when the involved parties sign. It serves as the controlling legal record of the transaction from that point forward. In a purchase agreement, there are some common things you must include.

• Identification of parties: You need to have names and contact information for the buyer and seller
• Description of the asset: A clear description of what is being sold
• Purchase price and payment terms: It should contain information about the agreed amount, payment method, and any deposit requirements
• Contingencies: Conditions that must be met before closing, such as financing approval or a satisfactory inspection
• Closing date: The date of ownership and payment transfer
• Representations and warranties: Statements by each party about the accuracy of information provided and the condition of the asset
• Default provisions: Terms and conditions that explain if one party fails to perform

In business acquisitions, the agreement may include additional schedules covering assets, liabilities, or intellectual property.

Common uses and examples

Purchase agreements appear across many types of transactions, each with its own requirements and considerations.

• Real estate sales. A residential purchase agreement specifies the sale price, inspection contingency, and closing date.
• Business acquisitions. The agreement documents which assets are included, the price allocation, and seller representations about the business’s financial condition.
• Membership interest transfers. When an LLC member sells their ownership stake, the transaction often uses a membership interest purchase agreement that addresses valuation, transfer restrictions, and consent requirements.
• Sale of goods. Under the UCC, certain contracts for the sale of goods must be in writing to be enforceable.

Purchase agreement vs. bill of sale

A purchase agreement is forward-looking; it governs the transaction before it closes. A bill of sale confirms a transfer has already occurred. In simple personal property transactions, a bill of sale may be the only document used. In real estate or business sales, both serve distinct roles: the purchase agreement governs the process, and the bill of sale confirms the completed transfer.

Key considerations for a purchase agreement

A purchase agreement creates binding obligations the moment both parties sign. Review these factors carefully before committing to the terms.

• Define contingencies clearly. Ambiguous language can lead to disputes about whether a condition was satisfied.
• Representations and warranties carry legal weight. A false representation, intentional or not, may give the buyer grounds for a claim after closing.
• Deadlines matter. Missing a closing deadline or contingency expiration date can affect a party's rights.
• State law governs enforceability. Real estate purchase agreements must meet specific statutory requirements in most states, including being in writing under the Statute of Frauds.

For complex transactions, attorney review before signing is advisable.

Related terms

A purchase agreement often works alongside other legal documents. These related terms can help clarify how the full transaction fits together. 

• Membership interest purchase agreement: A Membership interest purchase agreement (MIPA) is a contract that governs the sale of an ownership stake in a limited liability company.
• Buy-sell provision: A buy-sell provision is a clause in a business agreement that sets the terms under which an owner's interest can be bought or sold when a triggering event occurs.
• Operating agreement: An operating agreement is a legal document that outlines the ownership structure, member roles, and operating rules of a limited liability company (LLC).

FAQs about Purchase Agreement

When does a purchase agreement become legally binding?

A purchase agreement becomes legally binding when both parties sign and the basic contract elements are present: offer, acceptance, and consideration. Unsigned contingencies affect whether the sale must close, not whether the agreement is in effect.

What happens if a buyer backs out?

Without a valid contractual basis such as an unsatisfied contingency, the seller may retain the earnest money deposit and, in some cases, pursue specific performance. Available remedies depend on the agreement’s default provisions and applicable state law.

What is earnest money?

Earnest money is a deposit held in escrow to demonstrate the buyer's commitment to the transaction. It applies toward the purchase price at closing, returns to the buyer if they exit under a valid contingency, and the seller keeps it if the buyer defaults.

What is the difference between an asset purchase agreement and a stock purchase agreement?

In an asset purchase, the buyer acquires specific assets and generally doesn’t inherit the seller's liabilities. In a stock purchase, the buyer acquires the legal entity along with both its assets and existing liabilities, making due diligence especially important.