A PSA is a purchase and sale agreement: the binding contract for the sale of a commercial property. It fixes the price, the dates and the conditions on which the seller sells and the buyer buys. It takes over from the letter of intent once both sides agree on the business terms.
Most deals start with a letter of intent, a short outline of the price, the deposit and the timeline that binds the parties on a few clauses only. The lawyers then turn those terms into the PSA. It adds the legal terms the letter left open:
- what the seller promises about the building
- what lets the buyer walk away, and when
- what each side owes if it breaks the deal
The PSA is the fourth of the six steps of buying a commercial property. Either side's lawyer may draft it. In a marketed sale, the seller's lawyer often circulates its own form to the bidders who answered the offering memorandum.
Yes. Once both parties sign it, a PSA binds them to its terms. A buyer can walk away through a door the contract opens, such as a termination right during due diligence or a condition that fails. A seller can refuse to close where the contract allows it, and nowhere else.
Canadian brokers and lawyers call the same contract an agreement of purchase and sale (APS), and many commercial deals start from a provincial standard form. A 2022 review by the law firm Gowling WLG compares three of them (Gowling WLG, standard form contracts). Ontario uses the Ontario Real Estate Association's form, and Alberta the Alberta Real Estate Association's. The British Columbia form comes from the BC Real Estate Association and the Canadian Bar Association's BC branch. Each form "has been purposefully designed to accommodate the inclusion of supplementary provisions by the addition of schedules". The deal's own terms go in those schedules.
The same review found that "Neither the OREA commercial APS nor the BCREA commercial APS provides a right to inspect", so a buyer who wants inspections writes that right into a schedule.
Canadian forms call the buyer's exits conditions. A condition the buyer neither confirms nor waives by its deadline usually ends the agreement.
A commercial PSA names the parties and the property, then sets the money, the dates and the exits. It fixes the price, the deposit, the due diligence period, the seller's promises, the conditions, the closing date and the remedies for a default.
| Part | What it settles |
|---|---|
| Price and deposit | The price, the deposit, who holds the deposit in escrow, and when it counts toward the price |
| Due diligence period | The buyer's days to inspect the building and read the leases, and its right to end the deal before they run out |
| Title and survey | How the buyer objects to a defect in title, and how long the seller has to cure it |
| Representations and warranties | The seller's statements about the building, the leases and any lawsuits, and how long after closing the buyer can claim on them |
| Leases and estoppels | Copies of every lease, plus tenant estoppel certificates confirming each tenant's rent and terms |
| Conditions to closing | Financing, approvals and anything else that has to happen before the money moves |
| Closing and adjustments | The date, the documents each side signs, and how rent, taxes and deposits are split |
| Tax status | The seller's statement on whether it is foreign or a non-resident, which sets the tax the buyer withholds |
| Default and remedies | What each side can do when the other fails to close |
| Assignment | Whether the buyer can hand the contract to another company, often one formed to own the building |
A financing condition gives the buyer time to arrange its loan, and the commercial mortgage calculator shows the payment on the loan it expects.
The earnest money deposit is the sum the buyer pays into escrow after signing the PSA, to show it means to close. Buyers often believe the signature puts that money at risk. In a typical commercial PSA, the deposit stays refundable until the due diligence period ends, because the buyer can terminate before then and take it back.
The deposit "goes hard" on that last day. From then on, a buyer who walks away without a reason the contract accepts loses it. The termination deadline puts the money at risk, and the signature only starts the clock. Many PSAs make the buyer send written notice to terminate, so a buyer who stays silent proceeds. Some add a second deposit when the period ends.
Liquidated damages are a sum the contract fixes in advance as the cost of a breach. Most commercial PSAs name the deposit as the seller's liquidated damages if the buyer defaults: the seller keeps the deposit and gives up any claim for more. When the seller defaults, the buyer usually takes back its deposit and may ask a court for specific performance, an order that makes the seller complete the sale. Courts in each state and province decide when a fixed sum fairly estimates the loss. They refuse to enforce one they see as a penalty, so have a lawyer where the property sits read that clause.
A statement of adjustments is the closing sheet that splits a building's rent, taxes and prepaid costs between seller and buyer by the day. Each side pays for the days it owns the building. Canadian lawyers prepare it under the PSA's adjustment clause. A closing in the United States shows the same arithmetic as prorations on the settlement statement.
Take a $10,000,000 office building that closes on June 18, with a $200,000 deposit already in escrow. The seller collected June's rent of $60,000 on June 1 and holds $45,000 of tenants' security deposits. It prepaid an $18,250 service contract for the calendar year, which the buyer takes over. The year's property tax bill of $146,000 is still unpaid, and the buyer will pay it when it comes due. The example counts the closing day as the buyer's, so the seller owns the building for 168 days of the year and the buyer for 197.
| Item | Calculation | Credit |
|---|---|---|
| June rent already collected | $60,000 × 13 of 30 days | $26,000 to the buyer |
| Property tax for the year, unpaid | $146,000 × 168 of 365 days | $67,200 to the buyer |
| Tenants' security deposits | Passed over in full | $45,000 to the buyer |
| Service contract prepaid for the year | $18,250 × 197 of 365 days | $9,850 to the seller |
| Net adjustment | $138,200 − $9,850 | $128,350 to the buyer |
The buyer brings $9,671,650 to closing before its loan and its costs: the $10,000,000 price less the $200,000 deposit and the $128,350 net credit. The security deposits pass to the buyer because the tenants will claim them back from the new owner.
The adjustments do not always end at closing. Tenants under net leases reimburse operating costs, which the owner reconciles after the year ends. The PSA says how the seller and the buyer share that CAM reconciliation when it arrives.
FIRPTA withholding is the 15% of the amount realized that a buyer of real property in the United States holds back from a foreign seller and pays to the IRS. The IRS describes the rule as "Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding".
The duty sits with the buyer: "In most cases, the buyer (transferee) is the withholding agent. The transferee must find out if the transferor is a foreign person." So does the risk of getting it wrong: "If the transferor is a foreign person and the transferee fails to withhold, the transferee may be held liable for the tax" (IRS, FIRPTA withholding).
That rule explains a clause found in PSAs for property in the United States. A seller that is not foreign signs a certification at closing. The IRS describes it as a statement "under penalties of perjury, that the transferor is not a foreign person" (IRS, exceptions from FIRPTA withholding). With a foreign seller, the closing funds hold back the withholding before the seller receives its proceeds.
A section 116 certificate is the certificate of compliance the Canada Revenue Agency (CRA) issues to a non-resident seller. The seller obtains it by paying, or posting security for, the tax on its sale of Canadian property. Without it, the buyer carries the seller's tax. The CRA's circular on section 116 of the Income Tax Act sets the buyer's liability at 25% of the cost of the property. It rises to 50% for the property its paragraph 4 lists, which includes "a depreciable property that is a taxable Canadian property" (CRA, IC72-17R6). A building is depreciable property and the land under it is not, so one sale can carry two rates.
The circular lets the buyer protect itself: the purchaser "is then entitled to withhold that amount from the purchase price". It also warns that "Purchaser liability assessments are not subject to any time restrictions." A buyer owes nothing if, "after reasonable inquiry, there was no reason to believe the vendor was a non-resident of Canada". That is why a Canadian PSA has the seller state its residency, and why the closing funds hold back the amount until a non-resident seller delivers its certificate.
Take a $10,000,000 sale by a seller who is foreign on both sides of the border and delivers no certificate, with 80% of the price allocated to the building. The holdback in Canada climbs with the building's share of the price, while the rule in the United States ignores it.
Source: Sphera Credit calculation on a $10 million sale with no certificate: 15% of the amount realized under FIRPTA (IRS, FIRPTA Withholding); 25% of the cost of land and 50% of the cost of a building, which is depreciable property, under section 116 (CRA, IC72-17R6).
That gap is one reason a Canadian PSA often states how much of the price pays for the land and how much for the building.