Almost all contracts for the purchase and sale of apartment buildings in Los Angeles are created using the standard California Association of Realtors (CAR) form.
Overall, I believe the terms of this standard contract are pretty fair for both buyers and sellers (with the exception of the seller’s ability to tie up the buyer’s deposit in bad faith – but that’s another story).
But there is at least one item that I don’t like: The ability of the seller to lease units in the property during escrow. Here is the relevant language, from section 11A of the Residential Income Purchase Agreement:
“A. Prior to Close Of Escrow, Seller may engage in the following acts, (“Proposed Changes”), subject to Buyer’s rights in paragraph 18B: (i) rent or lease any vacant unit or other part of the premises; (ii) alter, modify or extend any existing rental or lease agreement; (iii) enter into, alter, modify or extend any service contract(s); or (iv) change the status of the condition of the Property.
B. At least 7 (or ) Days Prior to any Proposed Changes, Seller shall Deliver written notice to Buyer of such Proposed Changes.”
Now, as long as the actions take place during the contingency period, the buyer does have the right to walk away from the deal if the seller does something really objectionable. But the problem comes from middling scenarios. Here’s the worst one: The seller rents a vacant unit in the (rent-controlled) property for less than it’s worth.
The buyer was presumably counting on leasing the unit at market in order to justify the agreed purchase price. And once that new tenant has signed a lease at a below-market rent, it’s almost impossible to remove him. So the real value of the building has gone down from the buyer’s perspective. But the buyer has already committed time and money to the buying process and may feel compelled to move forward with the purchase.
In order to prevent this from happening, I like to insert the following text in the Section 16D “Other terms”:
“Notwithstanding anything to the contrary contained herein, during the escrow period identified in section 18B, seller shall not sign a lease on any unit in the property.”
Risk averted.
N.B.: I’m not a lawyer and this is not legal advice.