Should I use the CAR or AIR Form Agreement to Purchase Commercial Real Estate ?

Here is this article as a pdf with the actual provisions discussed.  Click here: AIR vs. CAR Real Estate Purchase Forms which to use

Most (90%+) of California realtors use either AIR CRE Standard Offer, Agreement And Escrow Instructions For Purchase of Real Estate (Non-Residential) (referred to as “AIR”) and the CAR Commercial Property Purchase Agreement And Joint Escrow Instructions (NON-RESIDENTIAL) (referred to as “CAR”). When it comes to real estate transactions, custom agreements usually are where the malpractice occurs. The AIR forms are designed to keep the transaction moving. The CAR forms allow the buyer more time to inspect, perform, or extend the closing date. Often, it is also more likely the buyer can get the deposit refunded if a CAR form is used.

The primary difference between the AIR and CAR forms are passive vs. active contingency removal.

Most “commercial realtors” will use the AIR form if they represent a seller because it has passive (auto removal) of contingencies. CAR forms are usually used if the realtor does not belong to the AIRCRE organization that licenses those forms. The CAR form is usually more favorable for a buyer. I have membership in both organizations and use AIR and CAR forms. I have also used CAR forms for sellers, as with everything, it just depends. 😊

AIR Agreement has passive or automatic contingency removal of the financing and physical inspection contingency. This means that if the buyer fails to notify the seller that it is not removing its contingencies it is presumed that the contingencies have been waived and the transaction will continue. For example, the AIR form at paragraph 5.2 and paragraph 9.1 provide in part:

Paragraph 5.2 states in part:  “If Buyer shall fail to notify its Broker, Escrow Holder and Seller … in writing… that the New Loan has not been obtained, it shall be conclusively be presumed that Buyer has either obtained said New Loan or has waived this …contingency.”

9.1 states in part: “If Buyer fails to notify Escrow Holder in writing, of the disapproval of any of said contingencies within the time specified therein, it shall be conclusively presumed that buyer has approved such item, matter or document.”

However, the CAR form is more lenient for buyers because the default requires affirmative, or active removal of contingencies in writing, or they are not automatically waived/removed. This is usually better for buyers. This is also why CAR forms require a series of Notice to perform/Notice to Cancel/Notice to Close, etc. before a party can terminate the transaction. The CAR form at paragraph 18 provides:

“Any removal of contingencies or cancellation under this paragraph by either Buyer or Seller must be exercised in good faith and in writing.”

The way the escrow closing date is calculated also differs between the AIR and CAR forms.

The AIR Agreement basis the closing date to the buyer’s removal of contingencies.  Paragraph 1.1 of the AIR Agreement ties the closing date to ____ days after waiver or expiration of Buyer’s Contingencies.  It provides in part:

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

The seller must then be aware that if an extension of the date for inspection or another contingency is made, but the seller does not want to extend the closing date, to make that clear when the contingency extension is provided to the buyer.  This may be a factor when 1031 deferred exchanges are involved.

The CAR Agreement sets the escrow closing date to +__ days after acceptance.  Paragraph 1. D. provides in part that:

“Close of Escrow shall occur on (_____ ) (date) (or ___ Days After Acceptance).”

Because the CAR Agreement is tied to the date of acceptance, extending buyer’s date to remove contingencies will not automatically extend the escrow closing date.  Most realtors forget about this which may create a loophole for the seller to serve a notice to perform and maybe notice to cancel escrow.  This is common in today’s “seller’s market”.

The AIR Agreement liquidated damages clause differs from CAR and only applies to the deposit.  AIR limits its built-in arbitration clause to liquidated damages or deposit disputes.  It also provides that if the deposit is paid as liquidated damages to the seller, then any escrow and title cancellation fees are paid by the seller.  If a broader arbitration clause is desired, then the separate AIR form arbitration addendum should be used.  However, even that addendum has limits on what is covered by arbitration.

CAR is consistently buyer friendly.  I like Paragraph 25 because it makes it clear that a clause added by a realtor (or a seller’s know it all lawyer) trying to change the intent of the CAR form is void.  Also, if the deposit is increased, a separate CAR form is required.  CAR’s liquidated damages clause at paragraph 25B is phrased similarly to the AIR form, but they both fail to comply with Civil Code section 1671 unless modified.

As to liquidated damages being kept by the seller, in my opinion both forms do not protect the seller.  The law abhors forfeiture and Civil Code section 1671 provides for a very high burden for the seller to keep the deposit.  But I have a secret way to help sellers, look for another post, maybe 😉.

Dispute Resolution differs between the AIR and CAR Agreements.  (AIR is limited to the deposit, and CAR is broader as to what disputes are included for arbitration.)

The AIR Agreement does not require mandatory mediation of disputes, and if selected, does not require the arbitrator to be an attorney or retired judge.  However, it requires arbitration of disputes about the buyer’s earnest money deposit if the parties initial that provision.

The AIR agreement paragraph 22.2 benefits the seller if the seller wins.  It provides in part:

“Buyer’s resort to or participation in such arbitration proceedings shall not bar suit in a court of competent jurisdiction by the buyer for damages and/or specific performance unless and until the arbitration results in an award to the seller of liquidated damages, in which event such award shall act as a bar against any action by buyer for damages and/or specific performance.”

Most disputes either concern the return of the deposit, specific performance or failure to disclose known defects.  If the buyer loses the fight over the deposit, then it’s game over.  I don’t understand how an arbitration of the deposit issue is tied to a specific performance action unless the seller wants to keep the deposit and not complete the transaction.  I assume this means that parallel proceedings can occur with one party arbitrating and the other suing in Superior Court until the arbitration award is final which would serve to put litigation expense pressure upon the parties to settle.

The AIR Agreement requires arbitration under the commercial rules of the American Arbitration Association, requires forfeiture of many normal rights in litigation, and requires that each arbitrator shall be an impartial real estate broker with at least 5 years of full time experience in both the area where the property is located, and the type of real estate involved.  Personally, I do not want a non-lawyer (or non-judge) making a final decision that cannot be appealed.  Therefore, I suggest parties not agree to the arbitration provision as written in the AIR agreement.

The AIR Agreement does not require mediation, but the CAR Agreement requires mediation to be awarded attorney’s fees.

Only the CAR Agreement has mandatory mediation in order to be awarded attorney’s fees.  I think the CAR Agreement is better because it requires that buyer and seller agree to mediate disputes before filing a lawsuit even if the arbitration clause is not signed.  The exceptions are if a an eviction or lis pendens needs to be filed.  The CAR form requires mediation through the C.A.R. Consumer Mediation Center which has many brokers and lawyers who will mediate disputes for less money than a retired judge.  However, the parties are free to choose whomever they want as mediator.  Paragraph 26A provides in part “… then that Party shall not be entitled to recover attorney fees, even if they would otherwise be available to that Party in any such action.”  The penalty for not mediating is severe, the party refusing to mediate may lose his or her right to recover attorney fees even if ultimately prevailing in the dispute.

The CAR Agreement requires that the arbitrator be an attorney, unless the parties choose otherwise.  Paragraph 26. B of the CAR Agreement requires the arbitrator be a retired judge, or an attorney with at least 5 years of transactional real estate Law experience, unless the parties mutually agree to a different arbitrator and gives the right to discovery.  This provision is better than the AIR agreement that requires a broker, not a real estate lawyer.  CAR paragraph 26. B. provides in part: “The arbitrator shall be a retired judge, or justice, or an attorney with at least 5 years of transactional real estate Law experience, unless the parties mutually agree to a different arbitrator.”

Assignment of the Agreement (AIR is more Buyer friendly)

The AIR and CAR forms differ about assignment of a signed purchase and sale agreement.  The AIR Agreement does not require the seller’s consent for a buyer to assign its rights under the agreement.  This makes it much easier for escrow to change the buyer to an LLC owned by buyer or a third party so the buyer can make a quick flip.   Paragraph 1.1 of the AIR Agreement provides in the last part of ¶ 1.1 buyer may assign the contract, but requires the seller to expressly release the buyer (which as a practical matter does not mean much).

AIR paragraph 1.1 provides in part: “Buyer shall have the right to assign Buyer’s rights hereunder, but any such assignment shall not relieve Buyer of Buyer’s obligations herein unless Seller expressly releases Buyer.”

The CAR Agreement is more restrictive because it requires seller’s consent for any assignment of buyer’s interest in the agreement.  From a practical point, the buyer can assign because it would probably be unreasonable for the seller to withhold consent.  But this clause may lead to unnecessary litigation if the seller wants to play games.  The CAR provision is at paragraph 30, providing in pertinent part:

“Buyer shall not assign all or any part of Buyer’s interest in this Agreement without first having obtained the written consent of Seller. Such consent shall not be unreasonably withheld unless otherwise agreed in writing.”

AIR requires the seller to provide tenant estoppel certificates, CAR does not.

This difference is mind blowing.  Many commercial transactions involve tenants in possession.  It is broker malpractice not to obtain tenant estoppel certificates.  I had a case that started after major law firm failed to obtain an estoppel certificate regarding the sale of a large hotel because it was a “small lease”.  While the case was a lot of fun, that small lease cost the hotel hundreds of thousands of dollars in unnecessary litigation.

The AIR Agreement requires the seller to provide buyer with estoppel certificates.  Paragraph 9.1(h) of the AIR Agreement provides in pertinent part that:

“Seller shall within 10 or ____ days provide …Buyer and Escrow Holder with legible copies of all leases, … and with a tenancy statement (“Estoppel Certificate”) … executed by Seller and/ or each tenant…Seller shall use its best efforts to have each tenant complete and execute an Estoppel Certificate for that tenancy.”

The CAR Agreement does not have a mandatory estoppel certificate requirement, rather, it requires a box to be checked for the seller’s obligation to provide signed tenant estoppel certificates.

Which form should I use?

As with most things, there are more than one way to do it.  The AIR and CAR Agreements both get the job done.  From my point of view, both are equal once I have modified them.  And if people want to breach the contract or sue, nothing can stop that.  However, a competent attorney can help eliminate some of the variables.  Commercial realtors (especially when representing a seller will probably use the AIR form.  Switch hitters (realtors that sell both residential and commercial) will probably use what they have on their computer – the CAR form.