Sample Cooperation Clause Language for Purchase and Sale Agreements

A well-drafted cooperation clause in a Purchase and Sale Agreement (PSA) is essential for ensuring a smooth 1031 exchange. This clause notifies all parties that the transaction involves a tax-deferred exchange and secures their agreement to cooperate without incurring additional liability or expense. Below, we outline key considerations for drafting a cooperation clause and provide sample language for use in PSAs.

Why a Cooperation Clause Matters

A cooperation clause clarifies that the seller or buyer is completing a 1031 exchange and requires assistance from all involved parties, including escrow officers, closing agents, and counterparties. This clause does not obligate the other party to participate in an exchange but ensures that necessary accommodations are made to comply with IRS regulations.

Essential Components of a 1031 Exchange Cooperation Clause

A strong cooperation clause should:

• Clearly state that the transaction is part of a 1031 exchange.

• Specify that the cooperating party will take reasonable actions to facilitate the exchange.

• Affirm that the cooperation does not impose extra costs or liabilities on the other party.

• Reference the involvement of a Qualified Intermediary (QI) to ensure compliance with IRS guidelines.

Sample Cooperation Clauses

For Sellers Completing a 1031 Exchange:

“Buyer acknowledges that Seller intends to structure this transaction as part of a tax-deferred exchange under Section 1031 of the Internal Revenue Code. Buyer agrees to cooperate with Seller and Seller’s Qualified Intermediary to facilitate the exchange, provided that Buyer incurs no additional cost, liability, or delay in the closing of this transaction.”

For Buyers Completing a 1031 Exchange:

“Seller acknowledges that Buyer intends to structure this transaction as part of a tax-deferred exchange under Section 1031 of the Internal Revenue Code. Seller agrees to cooperate with Buyer and Buyer’s Qualified Intermediary to facilitate the exchange, provided that Seller incurs no additional cost, liability, or delay in the closing of this transaction.”

Key Considerations for Implementation

• Include the Clause in the PSA Early – Negotiating the cooperation clause upfront prevents disputes later in the transaction.

• Consult Legal and Tax Advisors – Ensuring compliance with IRS guidelines and state laws helps avoid complications.

• Use a Qualified Intermediary – A QI must facilitate the exchange to prevent constructive receipt of funds by the exchanger.

Adding a cooperation clause to a Purchase and Sale Agreement is a simple yet crucial step in facilitating a successful 1031 exchange. While it does not create binding exchange obligations, it ensures that all parties are informed and willing to accommodate the transaction. Investors should work closely with their legal and tax advisors to tailor the language to their specific circumstances and maintain compliance with 1031 exchange requirements.