Maximizing Success in Commercial Real Estate: Key Differences Between AIR and CAR Purchase Agreements

When guiding clients through commercial real estate transactions in California, attorneys, real estate agents, and brokers often encounter standardized purchase agreements from various organizations. For commercial property transactions, two commonly used agreements are the AIR Commercial Real Estate (“AIR CRE”) Standard Offer, Agreement, and Escrow Instructions for Purchase of Real Estate (Non-Residential) (“AIR Agreement”) and the California Association of Realtors (“CAR”) Commercial Property Purchase Agreement and Joint Escrow Instructions (Non-Residential) (“CAR Agreement”).

While these agreements serve similar purposes, they differ in key areas that can significantly impact buyers, sellers, and their representatives. This article highlights five critical distinctions between these contracts to help real estate professionals effectively navigate transactions and safeguard their clients' interests.

1. Contingency Removal: Passive vs. Active

Understanding contingency removal processes is crucial, as the buyer's deposit often becomes non-refundable once contingencies are waived or removed. The AIR and CAR Agreements handle this process differently, requiring careful attention.

AIR Agreement

The AIR Agreement employs passive contingency removal, meaning contingencies are automatically waived unless the buyer explicitly disapproves them by a specified deadline.

• Financing Contingency (Paragraph 5.2): If the buyer fails to notify the seller, escrow holder, and broker in writing that the loan was not obtained, it is presumed waived.

• Physical Inspection Contingency (Paragraph 9.1): Similarly, failure to disapprove inspections or related documents in writing by the deadline results in automatic approval.

Implication: Buyers risk unintentionally waiving contingencies and forfeiting their deposit if deadlines are missed. Legal and real estate professionals must closely monitor contingency expiration dates.

CAR Agreement

The CAR Agreement requires active contingency removal. Buyers must affirmatively and in writing remove contingencies by the specified date.

• Active Removal Requirement (Paragraph 18): Sellers must deliver a Notice to Buyer to Perform before canceling the agreement if contingencies are not removed.

Implication: The active removal process offers buyers greater protection, reducing the risk of inadvertent waiver.

2. Close of Escrow

Closing date provisions differ between the AIR and CAR Agreements, affecting how extensions are handled.

AIR Agreement

The AIR Agreement ties the closing date to the removal or expiration of buyer's contingencies.

• Expected Closing Date (Paragraph 1.1): “Escrow… to close 30 or ____ days after the waiver or expiration of Buyer's Contingencies.”

Implication: If contingencies are extended, the closing date extends unless explicitly stated otherwise. Sellers' attorneys should include language preserving the original closing date if needed.

CAR Agreement

The CAR Agreement links the closing date to the date of acceptance.

• Close of Escrow (Paragraph 1.D): “Close of Escrow shall occur on [specific date] (or ___ Days After Acceptance).”

Implication: Extending buyer's contingencies does not automatically extend the closing date. Attorneys should ensure closing dates are adjusted if necessary.

3. Dispute Resolution

Dispute resolution mechanisms in the AIR and CAR Agreements reflect different approaches to arbitration and mediation.

AIR Agreement

• Mandatory Arbitration (Paragraph 22.1): Limited to disputes about the deposit.

• Arbitrator Qualifications: Must be a real estate broker with at least five years of full-time experience in the property's location and type.

Implication: Arbitration does not preclude court action for damages or specific performance unless liquidated damages are awarded to the seller in arbitration.

CAR Agreement

• Mandatory Mediation (Paragraph 26.B): Required before pursuing arbitration or litigation, with failure to mediate resulting in forfeiture of attorney fees.

• Arbitrator Qualifications: Must be an attorney or retired judge with at least five years of transactional real estate law experience.

Implication: Mediation fosters early resolution, and the CAR Agreement's stringent attorney requirements ensure legal expertise.

4. Right to Assign

The ability to assign purchase agreements differs significantly between the AIR and CAR Agreements.

AIR Agreement

• Assignment Without Seller Consent (Paragraph 1.1): Buyer may assign rights freely but remains liable unless expressly released by the seller.

Implication: Offers buyers maximum flexibility to assign agreements.

CAR Agreement

• Seller Consent Required (Paragraph 30): Assignments require seller's written consent, which “shall not be unreasonably withheld.”

Implication: While consent cannot be unreasonably withheld, the CAR Agreement imposes greater constraints on buyers.

5. Estoppel Certificates

Estoppel certificates play a vital role in commercial real estate transactions, ensuring tenant representations about lease terms are accurate.

AIR Agreement

• Default Requirement (Paragraph 9.1(h)): Seller must use best efforts to provide tenant-executed estoppel certificates.

Implication: Buyers receive this assurance by default.

CAR Agreement

• Optional Requirement (Paragraph 11.B(3)): Seller delivers estoppel certificates only if a specific box is checked.

Implication: Buyers must ensure this box is checked to avoid oversight.

Both the AIR and CAR Agreements offer benefits, such as familiarity and efficiency in review. However, their differing provisions can create risks and opportunities for buyers and sellers. Attorneys, brokers, and agents must thoroughly evaluate these distinctions and tailor the agreements to suit the transaction's unique needs.

By understanding these key differences, real estate professionals can better protect their clients and guide them to successful outcomes in commercial property transactions.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. For specific legal questions or concerns, consult a qualified attorney.