How to Translate Common Legalese when Drafting an RAL Asset Purchase Agreement.
What is the difference between a “Background,” “Preamble,” “Recitals,” or “Whereas” sections of a contract in an Asset Purchase Agreement
The number of residential assisted living homes being bought and sold is on the upswing. Each of these requires an asset purchase agreement, if the real estate is properly separated from the business operations.
An asset purchase agreement (“APA”) is a legal document that transfers ownership of certain assets from one party (the seller) to another (the buyer). An APA typically includes a description of the assets, the purchase price, the representations and warranties of both parties, and other terms and conditions of the transaction. In this article, we will focus on how to write the background or preamble section of an APA for a residential assisted living (RAL) business. The background or preamble section provides the context and purpose of the agreement, as well as some basic information about the parties and the assets involved.
Let’s start with translating legalese to English.
The “Background” section of a contract typically follows the first section that identifies the parties to the contract. The Background is the common English language term that is gradually replacing the more “lawyerly” words “Preamble,” or “Recitals” or the “Whereas” clauses. These terms are generally interchangeable and refer to the same section of an APA. All of these titles are used to describe a series of statements explaining the background and intent of the parties.
This section of the contract can be relied upon by the parties and courts for interpretation of the contract and determination of the parties’ intent.
What is in aTypical Background Section of an RAL Asset Purchase Agreement?
The background section of a contract for the purchase of an assisted living facility outlines several key points about the seller's business. Naturally, it starts by stating that the seller currently owns and operates an assisted living business in a specified state.
This section will also usually include a few sentences going into more detail about the nature of the assisted living facility, including the type of care provided, how it is categorized by the state, and the maximum number of residents permitted by state and local regulations.
The background will also detail the business's licensing information, such as the license number or facility ID, its expiration date, and the issuing state agency's name. This underscores the legal standing and operational legitimacy of the business.
The background section also typically includes a mutual acknowledgment by both seller and buyer of their intent to transfer ownership of specific assets tied to the business. The assets, any any exclusions from the assets being purchased, are usually described in more detail later in the contract. Often on a “schedule” or list. However, the background section refers to those assets generally, and points out that the transfer of those assets will be subject to (limited or restricted) by other language in the contract. This “other language” is especially important because it includes the limits of what the parties have determined will not be transferred – in particular -specific liabilities.
The assisted living ownership transfer often occurs concurrently with the purchase of the real estate that houses the assisted living business, highlighting the interdependence of these two transactions. The parties recognize the critical nature of the real estate deal to the overall success of the business transfer, as owning the business without the associated real estate is usually not desirable for the buyer.
It's crucial to understand that acquiring an assisted living business involves more than just adding a few lines to a real estate contract. This business operates under specific licenses and is a significant entity in its own right, far from being an inconsequential asset like a piece of equipment. After all, when you sell your car, you are not simultaneously selling your Driver’s License.
The recitals section sets the stage for the rest of the asset purchase agreement by providing this essential background information. While the details mentioned here are common, additional specifics might be included based on the unique aspects of each transaction.
The information herein is intended to be educational and an introduction to the subject matter presented. Despite any statutory or regulatory references cited in the article above, it is NOT specific legal advice to be relied upon for specific individual circumstances. Contact your own legal professional or reach out to our firm if you would like specific advice on this topic.
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