What is a PSA Agreement?
Both buyers and sellers will encounter the term Purchase and Sale Agreement or "PSA." In this context, a purchase and sale agreement is simply a contract, the purpose of which is to obligate the parties to consummate a real estate transaction. The actual real estate transaction will likely occur months, or even longer, after the parties enter into the PSA.
Under terms of a PSA, a seller will typically take possession of a purchase price deposit. This deposit will serve as part of the purchase price if you go the closings . If the deal falls through, a buyer may lose the deposit as well as other rights they might otherwise have.
In addition to binding a seller and buyer to go to closing, a PSA can be used to establish material timing, performance and other contractual terms that should be agreed upon as a prerequisite to the closing of a sale. A PSA (sometimes called an offer or sales contract) should be the start of a meaningful negotiation between a buyer and seller.
Essential Components of a PSA Agreement
The terms and conditions within each PSA are fully negotiable, but certain elements are common to every purchase and sale agreement, and these typically include:
The address, description, type and square footage of the property
The sales price
The date that the buyer will take possession
The date the current owners will surrender possession
The closing date (or the date the contract becomes binding)
The extent and limits of the buyer’s inspection rights
The types of inspections to be performed
The obligation of the seller to make repairs and/or improvements
The extent to which the buyer can assign rights and obligations under the contract
Inclusions / exclusions from the sales contract
The contingencies involved in the transaction (such as an appraisal, financing or otherwise)
The financing being used for the purchase, including information on how the buyer will secure any mortgage loans and the amount of the down payment
The earnest money deposit. The earnest money deposit is like a good faith deposit that helps ensure both the buyer’s and seller’s commitment to the transaction and protects the seller from a buyer getting cold feet after the seller has relied on the commitment. In most cases, the earnest money deposit is held in escrow by the law firm handling the closing or by the real estate broker who is responsible for legally facilitating the sale. The amount of this deposit is commonly 1-5 percent of the purchase price.
The contingencies that can terminate the contract, typically including mortgage commitment, home inspection and other investigations by the buyer into the seller’s disclosures and representations
The buyer’s right to an extension if the seller is unable to fulfill the terms of the contract.
The conditions for home sale contingency
The forfeiture of the earnest money deposit
The limitation of damages if the buyer defaults
All work to be done on the property by the seller before the closing
Indemnification of the seller for losses caused by the buyer’s action
Disclosures made by the buyer for the buyer’s benefit, such as identifying the county in which the property was located and drawing attention to the buyer about the applicability of property taxes
What to expect at closing
Different Types of PSA Agreements
There are many different types of purchase and sale agreements (PSA) depending on the asset at hand. There is a great deal of flexibility in structuring a PSA which allows for an end result that suits both buyer and seller. In this section, several examples will be provided to illustrate the nature of some commonly encountered PSAs:
Real Estate
In real estate, a PSA is often used for the transfer of property, particularly transfer that revolves around a real property purchase, sale or gift. Typically two parties who are either buying or selling real estate will enter into a PSA that specifically addresses details such as, but not limited to, price and description of the property. The overarching goal of this kind of PSA is to describe the terms of, and obligations relating to the transaction between the buyer and the seller in order to create an enforceable agreement in the event that one of the parties decides not to follow through on their obligations.
Business Sales
A PSA is very useful when it comes to the sale of a business. At its core, it provides for the protection of both the buyer and the seller through legally binding provisions for the future of the relationship. Although there are many types of agreements that can be covered by a PSA, for example a personal service agreement or employment agreement, a PSA designed for a business sale is typically quite comprehensive. It may address matters such as covenants regarding non-competition and confidentiality, nor does it have to be an expensive proposition. Ensuring the proper protections via the use of a PSA can save considerable amounts of money in the long run. This may be particularly true if intellectual property or other intangible assets are at the heart of the transaction.
Asset Transfer
Asset transfers can be a prime candidate for an asset purchase agreement. A simple version of a PSA for an asset transfer is often quite simple and inexpensive. But if the parties involve are complex, and the deal structure involves a large number of assets, the PSA is a perfect opportunity to define key aspects of the deal, while still being able to make it specific to the requirements of the parties. For example, in an asset transfer involving the sale of a large number of assets, it may be important to ensure all the relevant assets are listed in order to avoid potential litigation.
Significance of PSA Agreements
The importance of a PSA agreement cannot be overstated in legal transactions. At its core, it is designed to clearly define the conditions under which a sale is to occur so that questions which may arise later can refer back to the PSA. Also, they help provide a balance of protection for both the seller and the buyer. In some cases, this is a simple issue of defining the price of the sale. However, things such as contingencies and prohibitions from selling without appropriate notice also need to be considered. Lastly, the PSA can become important when a buyer tries to back out of the sale. Because they are binding documents that clearly set out the terms of the sale, it is easy to hold a seller to the terms of a signed PSA.
How to Write a PSA Agreement
Drafting a PSA agreement requires careful consideration of the specific issues involved in the transaction between the seller and buyer of the business or real estate. An asset purchase or a real estate deal will differ significantly from a stock purchase agreement. Even two similar asset purchase transactions can have different structures based on how various issues are handled. There is not a standard form for these agreements that can be used in all transactions because each business transaction and each real estate deal will have its own set of parameters.
The process of developing an asset purchase agreement or a purchase and sale agreement for real estate often starts with a request for a term sheet from the purchaser. The purpose of the term sheet is to engage in a discussion with the seller and its professional advisors to decide whether it is worth the time and money to proceed to negotiate a detailed agreement. Once the decision is made to proceed with the transaction, a letter of intent, memorandum of understanding or another agreement is drafted that describes the key terms of the deal. This term sheet , letter of intent or memorandum of understanding should not be binding on either party. Even if the parties intend to be bound by the term sheet or letter of intent, it’s best to make them subject to the negotiation of a sale agreement and due diligence.
The sale agreement is then drafted to describe the terms of the sale, the assets involved, the price and the payment terms. Other key provisions that will need to be agreed upon include the covenants, representations and warranties of the parties and any post-closing obligations. The agreement should also include representations and warranties indemnification and limitations on liability. A good agreement will also include some or all of the following provisions: confidentiality; non-competition and non-solicitation; future access to records and information; books and records; closing conditions; conditions to termination and liability for failure to close; closing arrangements and payments; and dispute resolution.
A professional’s review of the agreement should be undertaken to ensure that it is prepared properly to meet the needs of the seller and purchaser and the transaction complies with the law.
Common Pitfalls in PSA Agreements
One of the most common challenges we see with PSA agreements involves how certain actions fit in with what is or is not covered by the agreement. For example, a partner may want to perform a PSA initiated change with a value of more than $20,000, but the other partner disagrees, even though the amounts in the PSA agreement are not anything close to being exceeded.
In this example, the parties will probably need to further consult the PSA agreement to learn whether the PSA agreement requires a defined or indefinite period in which the PSA initiated change must be allowed, what the process is for requested changes that may be out of scope of the PSA agreement, and whether partners have a separate dispute resolution process for PSA initiated changes.
Another common issue with PSA agreements comes up when a partner refuses to use a deal code. Deal codes serve to allow the company to trace all financial activity in a deal back to a specific PSA agreement. This can be an important factor for historical purposes.
However, some partners have a different view on what should and should not be ruled as a deal code. Disputes can arise over whether an action is indeed one that requires a deal code, or if it perhaps falls outside of the scope of such.
We recommend that people discuss PSA agreements at length before signing them so that everyone has an understanding of what they mean, but also, to ensure that certain areas are covered both in depth and with sufficient specificities so that any potential issues are avoided.
Legal Consequences of PSA Agreements
The legal implications of PSA agreements are numerous. For example, PSAs almost always contain a so-called "sunset" provision, meaning that if a couple has not reconciled by the expiration date of the agreement, it is void. However, we often find that the couple has reconciled substantively and may even appear to the world that they are living happily ever after, but for one reason or another do not try to get their PSA agreement re-approved by the court. Whether this is wise depends on the specific terms of the agreement and the circumstances involved.
Another issue is the need to engage in discovery for an impending divorce or legal separation. The rule is fairly straightforward, however. If there is no agreement that prohibits the disclosure, then information that is generated during the case is likely going to have to be disclosed. Legally, the parties are not divorced, and therefore, there is no attorney-client privilege or spousal communication evidentiary privilege between them.
If a spouse or former spouse violates the PSA in any way, then you may be able to file a motion to have the court enforce its terms. This may include an order compelling the delivery of documents, transfer of property, or payment of sums of money. A VSPO may also include provisions that give the parties the opportunity to resolve the breach by private mediation without court intervention. In some cases, a former spouse will return a piece of real property, or an interest in a business, even if it violates the terms of the agreement. Once the object is returned or transferred, and both parties agree to ignore the breach, there may be little that the court will do to enforce the PSA. On the other hand, if an ex-spouse is refusing to abide by the terms of the PSA, such as when they conceal an asset or withhold a payment, the court may penalize them with sanctions.
Latest Developments and Trends in PSA Agreements
In recent times, there have been a number of emerging trends and updates impacting Personal Services Agreement (PSA) arrangements with physicians. One recent push is for transparency in PSA arrangements. Increased examination and scrutiny on physician compensation arrangements have been a common theme lately, including recent investigations in 2019 regarding PSA arrangements under the FCA and Stark Law. Federal prosecutors are focusing their attention on PSA arrangements that appear to reward physician referrals to hospitals or other health care organizations , and the results of these prosecutions may eventually lead to increased penalties to health care organizations for a violation.
Another trend for PSA agreements seems to be particular to hospital and physician group relationships. Some hospitals or physician groups are now requiring that their employed physicians enter into PSA agreements with the other party, and further limit compensation paid under the PSA agreement in relation to their compensation as an employed physician.
There is also increasing interest in teladoc, telemedicine, and similar services. In connection with this, health systems and physician groups have begun offering such services through PSA agreements with physicians who deliver such services. Emerging regulations governing telemedicine providers and telehealth services have yet to be clarified and matured, which will likely have further impacts PSA arrangements in the future.