# Sales and Purchase Agreement Explained: Definitions and Examples

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## What Is a Sales and Purchase Agreement (SPA)?

A sales and purchase agreement (SPA) is a legally binding document critical to transactions between buyers and sellers, detailing the terms and conditions agreed upon. Often utilized in [real estate](https://www.investopedia.com/terms/r/realestate.asp), SPAs also extend to various business sectors. This agreement signifies the conclusion of negotiations, capturing the essential conditions for the sale.

### Key Takeaways

*   A Sales and Purchase Agreement (SPA) is a legally binding contract that lays out the terms and conditions between a buyer and a seller, ensuring that a transaction will occur.
*   SPAs are commonly used in real estate and large business transactions, where they finalize negotiated terms, including price, payment plans, and any conditions that must be met before the deal can close.
*   The agreement includes critical sections such as asset identification, purchase price, due diligence, conditions prior to closing, and remedies for damages, ensuring clear protocols and responsibilities for both parties.
*   While not always mandatory, having an SPA provides legal protection in business transactions, giving parties a framework to rely on if disputes arise.
*   The length of an SPA can range from a single page to hundreds, depending on the complexity of the transaction and the specifics required to fully outline the agreement.

## How a Sales and Purchase Agreement (SPA) Works

Before a transaction can occur, the buyer and the seller negotiate the price of the item to be sold and the conditions for the transaction. The SPA is a framework for the negotiation process. SPAs are often used for large purchases like real estate or for frequent purchases over time.

Once signed, the SPA is a legally-binding document between the parties. Usually, an independent third party prepares and oversees the SPA to ensure a smooth transaction closing. The agreement also records when the final sale is to occur.

## Key Components of a Sales and Purchase Agreement

Depending on the size of the transaction, there may be a substantial amount of content within a single SPA. Here are some examples of what you may see in an SPA.

### Asset Identification

An SPA specifies the asset being sold. In the case of real property, the physical location (i.e. address, parcel numbers) are identified. This section is less robust for the sale of duplicative goods that can easily be interchanged.

### Purchase Price and Conditions

A SPA defined the exchange price of the transaction. The agreement also details the upfront deposit amount and how it will be paid. This section of the agreement also outlines how the remaining balance (total purchase price less deposit) will be paid.

### SPA or PSA?

A 'sale and purchase agreement' may also be referred to as 'purchase and sale agreement'. In this context, an SPA is the exact same as a PSA.

### Conducting Due Diligence in a Sales and Purchase Agreement

For the sale of larger assets, there is often a section within the SPA requiring the purchaser to acknowledge their due diligence within the process. The PSA may outline additional due diligence periods that may correspond to additional deposits or upfront payments.

This section also likely includes indemnification statements and the purchaser's acknowledgment of the condition of the assets. The purchaser also usually certifies their right to terminate the deal under certain circumstances. Last, this section may include clarification on who within the purchaser's team has the authority to make representations on behalf of the company.

### Essential Pre-Closing Conditions in an SPA

An SPA generally outlines the next steps in the transactions. These conditions of the sale must occur in order for the sale to be legally binding; any inaction or fail to follow these conditions is considered a breach of contract. Under these circumstances, the purchaser may have the right to terminate the sale (if such rights are identified in the section prior).

Many covenants focus on risk reduction and asset protection. This section often outlines what a seller must do if there is any unforeseen litigation impacting the transaction. It also outlines what insurance requirements should cover the asset through sale, what warranties will continue to exist, and certifies the exclusivity of the asset being sold.

### Handling Damages and Remedies in an SPA

There may be circumstances in which communication is needed to explain what each party will do if the asset being sold is damaged prior to sale or during transit. This section often defines different levels of damage such as minor damage and major damage. Then, the contract outlines various remedies for each level of damage.  

### Additional Sections in a Sales and Purchase Agreement

If applicable, there may be other sections to an SPA. Real estate transactions will often include title and survey information regarding the property. Specific covenants and conditions may include language involving existing tenants or current conditions of the space.

An SPA often outlines applicable broker commissions. Including the dollar amount to be paid, an SPA also details who is responsible for paying commissions as well as the process and timing of issuing those payments.

### SPA Length

An SPA can be a single page or it can span hundreds of pages with dozens of supporting exhibits. The purpose of an SPA is to outline at relevant terms and conditions. If there aren't many, the document may be short; if there are many, expect lots of reading.

For transactions that require confidentiality, an SPA outlines the conditions of the deal. This includes the stipulations around public or press releases, use of promotional materials referencing the sale, and remedies in the event one party breaches this aspect of the contract.

If the sale is contingent on other transactions, an SPA will outline the effects of termination in any sale should the other deal fall through. For example, consider a developer buying neighboring properties to demolish them for a single new building. The developer may include language in one SPA holding the deal contingent on the execution of the other SPA.  

## Examples of SPAs in the Marketplace

One of the most common SPAs occurs during real estate transactions. As part of the negotiation process, a final sales price is agreed upon by both parties. Additionally, other items relevant to the transaction, such as a closing date or [contingencies](https://www.investopedia.com/terms/c/contingency.asp), are also included.

SPAs are used by large, publicly traded companies in their supply chains. An SPA may be used when obtaining a large number of materials from a supplier or in the case of a large-scale single purchase. For example, a company may enter into an SPA with a supplier to purchase a defined quantity of goods for a specific price.

An SPA may also function as a contract for revolving purchase,s such as a monthly delivery of raw materials, inventory, or other tangible goods. The purchase/selling price can be set in advance, even if the delivery is set at a later date or spread out over time. SPAs are set up to help suppliers and purchasers forecast demand and costs, and they become more critical as the transaction size increases.

In another example, an SPA is often required during a transaction in which [one business is acquiring another](https://www.investopedia.com/articles/pf/08/sell-small-business.asp). Because the SPA specifies the exact nature of what is being bought and sold, the agreement may allow a business to sell its [tangible assets](https://www.investopedia.com/terms/t/tangibleasset.asp) to a buyer without selling the naming rights associated with the business.

## What Is a Sales and Purchase Agreement?

A sales and purchase agreement is a legally binding agreement obligating a buyer and a seller to terms of a transaction. The SPA outlines all of the terms and conditions of the exchange and must be signed by both parties.

## Do I Need a Sales and Purchase Agreement?

In the exchange of goods, an SPA protects both the buyer and seller. While an SPA is technically not required, it is often a very good idea to have terms and conditions outlined in a legal document prior to the transaction occurring. You will often have no legal recourse in a failed transaction without a contract in place.

## Are SPAs Legally Binding?

Yes, SPAs are legally binding. Often the last document furnished as part of the purchase or sale of an asset, it is signed by authorized representatives from both parties when both sides are prepared to execute the deal.

> **Article Sources**
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> 1.  RedFin.com. "[What is a Purchase and Sale Agreement?](https://www.redfin.com/blog/what-is-a-purchase-and-sale-agreement/)"
>     
> 2.  Template.net. "[20+ Purchase and Sale Agreement Templates](https://www.template.net/business/agreements/purchase-and-sale-agreement-templates/)."