When 2 parties sign a real estate contract, they generally do so with the expectation that the seller wants to sell and the buyer wants to buy. Basically, at the time that the contract is signed, both parties want to close. However, sometimes, things happen and one of the parties changes their mind and decides they don’t want to close. Now what?

There is no right or easy answer to this question. Who is attempting to terminate the contract and their reason for doing so are important factors in determining what to do. A common occurrence is when a buyer decides not to proceed at the end of the due diligence period. Most commercial real estate contracts and many residential contracts provide the buyer a time, following contract execution, to inspect the property and determine whether it is suitable for buyer’s use. Sometimes the inspection paragraph is broadly drafted and sometimes it is narrow in scope. At the end of the due diligence period, the buyer, if not satisfied, may provide notice of termination to the seller and the deposit is to be released to the buyer. Most of the time, this goes without a hitch.

But things don’t always go smoothly here, even though the provision has been negotiated and is clearly spelled out in the contract. Sellers have waited through the due diligence period patiently (or not) and want to proceed to closing and object to the termination. I had a case where my buyer client requested several extensions of the due diligence period, purportedly to complete zoning review. When the buyer ultimately terminated the contract, seller objected arguing fraud because the buyer had never made application for approval and failure to give timely notice of termination. The due diligence provision was broad and allowed the buyer to terminate for any reason. But, seller refused to consent to the release of the $50,000 deposit. When no agreement could be reached, my buyer client sued for release of the deposit. The escrow agent placed the deposit in the court registry. We prevailed at summary judgment with the court finding that the seller had voluntarily executed each amendment extending due diligence and buyer’s notice of termination was timely. Seller had to release the deposit and pay buyer’s attorney’s fees. Whether the buyer had made application for the zoning approval was not relevant.

A buyer might also attempt to terminate a contract because of a failure to satisfy other contingencies such as financing or government approvals. From the buyer’s perspective, it is important that, regardless of how the contract is drafted, the buyer document its efforts to timely satisfy the contingencies and keep the seller advised of all its efforts. If buyer does not keep the seller informed and then is unable to satisfy a contingency, seller could have grounds to object to buyer’s attempt to terminate the contract and recover the deposit. If not expressly stated, buyer has an implied covenant of good faith which means that the buyer must use its best efforts to satisfy the contingencies. If the seller isn’t in the loop, the seller can also allege that the buyer has not reasonably attempted or used best efforts to do so.

Sellers, likewise, fail to close from time to time. Buyers’ remedies are usually clearly spelled out – specific performance being the most common. To assure that a buyer can pursue specific performance as a remedy, buyer must demonstrate that it was “ready, willing and able” to close on the closing date and seller failed to perform.

This can be illustrated in another case I had a few years ago. My client was a tenant under a commercial lease. Under the lease, the client had an option to purchase after the 3rd lease year if exercised between 120 and 60 days before the end of the 3rd lease year. The terms of the purchase were set forth in the lease and the option was to be exercised in writing to landlord by tenant preparing a contract, signing the contract and sending it to landlord. Closing was to occur 60 days thereafter. We prepared the contract and timely exercised the option. The landlord’s attorney responded that the option was not valid for a myriad of reasons and if we wanted to purchase the property, the price would be 2.5 times the option price. The shake down was on.

Though we spent the next 60 days arguing with the landlord’s attorney as to why the landlord was wrong about the validity of the option, we also prepared for the inevitable lawsuit by getting ready for closing. We ordered title and survey. We prepared closing documents. The client sent me the required deposit and I notified the landlord and the attorney that the deposit was being held in my trust account. Upon receipt of the title commitment, I sent a title objection letter. We prepared a closing statement and requested seller documents. The day before the closing, the client wired the net closing proceeds to my trust account.

On the scheduled closing date, I sent the buyer signed closing documents to the landlord’s attorney and advised that all closing proceeds were in my trust account ready to be delivered to landlord/seller upon receipt of the deed and other closing documents. In effect, I “tendered” the closing proceeds. Of course, the seller/landlord rejected our tender and refused to close. We filed a lawsuit for specific performance and, because we took all of these steps, won on summary judgment. After concluding that the option was valid (rejecting all arguments of the landlord), the court cited each step we took to confirm that buyer was ready, willing and able to close and ordered landlord to convey the property to my client. Landlord was also ordered to pay all of my client’s legal fees.

Disputes over closings occur. Attention to detail on both buyer’s and seller’s side is necessary to enforce the contract or to resolve the dispute without litigation. Luckily, I have only had a handful of these cases go to court over the years. Not every deal will close. In fact, most won’t. But no one wants to litigate. Detail starts in the contract and continues as you work through due diligence and prepare to close. If the transaction is not going to close, this attention to detail will help avoid the costs of litigation.

The holiday season is supposed to be a joyful time. Beginning at the start of November, as thoughts turn towards Thanksgiving turkey, cooler temperatures, family gatherings, Christmas, Chanukah, New Years and shopping, a certain contentment begins to settle in all around.  Or does it?

Certainly not in offices where real estate closings take place. Holiday season brings panic.  As year end approaches, the calendar is the enemy.  Everybody wants to close and everything is a rush.  A feeding frenzy has begun.

Why does this happen? I remember when I first began practicing, we always had to get 1 or 2 last big deals finished before the end of the year.  My senior partners always told me we had to do this for “tax reasons”.  The first couple of years, I assumed that this was because the client had tax planning reasons for closing by December 31.  I then came to realize that it was really for the firm’s cash flow needs that December 31 was critical.  Close the deals, collect large fees, partners get bonuses, don’t close, no fee, partners don’t get bonus.  Simple economics!

Later, when I started practicing on my own and money in the bank on 12/31 vs. 1/1 made no difference to me, we still had surges in November and December. But, if deals weren’t closed by the middle of December, many clients began to close up shop for the holidays, deciding to carry over the gain or loss until the next tax year.  Thus, 12/31 became an artificial deadline.  Sometime before 12/20 was the new deadline only for my own peace of mind.

Today, the feeding frenzy is as real as ever. It is true for residential and commercial closings.  Some of it might have to do with Trump tax reform.  But there are other factors.  First, we continue to ride a long, strong economy.  The real estate market remains strong and interest rates remain low.  With so many deals out there, clients want to close quickly to take advantage of the economic climate and interest rates before this changes.

Second, contracts signed early in the year, after everything closed at year end, run their course and have year end closing dates. There are 2 factors driving this.   Commercial deals are longer term.  Once the due diligence period has run its course and approval and other contingencies have been satisfied, closing must occur.  In a typical commercial contract, this can take 6-12 months, sometimes longer.  But when the date comes up, there is a rush to close.  Though you can’t predict when a contract will be signed, it does seem that many projects start at the beginning of the year which often times out the closing date for the end of the year.  As to residential contracts, many people put their homes up for sale in the summer, after the school year.  Consequently, contracts are often signed at the end of summer and early fall.  Closings usually take 60-90 days, which puts the closing right in the middle of the holiday period.

Third, cash deals are very common in both residential and small commercial contracts. Take a lender out of the picture and the process to close gets shorter.  Sellers like to accept cash contracts as it takes a major contingency out of the picture, further shortening the closing.  Sellers will accept lower purchase prices to get to closing faster.  If the expectation is a faster closing, a closing scheduled for the holiday time period will not likely carry over to the new year.

How do we cope with the frenzy and avoid becoming shark chum? Clients, brokers and other attorneys can sense stress immediately and when they do, they do what they can to add to it.  It is important to remain organized and up to date on every transaction, no matter the size, so that you never let the sharks smell the blood in the water.  If we do this, we will make it from Thanksgiving to New Years in one piece.

Selecting the right property to buy or lease can be tricky. Every one knows the old adage “location, location, location”.  Clearly, location is crucial to every one involved in a real estate project from brokerage to development to construction; from lending to investment; from management to leasing, location will be a crucial factor in everyone’s return on the investment in real estate.  However, a corollary to location is zoning, zoning, zoning.  A property that does not have the proper zoning and land use designation for the proposed use, and one that can not be appropriately re-zoned, or variances obtained, will have no value to a buyer, developer, tenant or investor and location will add no value.

This rule applies to properties that are being purchased or that are being leased. A retail location might be the best spot in town for your client’s hot new night club.  But zoning might not allow any business which serves alcohol to be located in that location because a church is located within 1000 feet.  Or, noise regulations prohibit music after 10:00 because of the hospital across the street.   These are some of the things that should be considered even before entering into a contract or a lease.  They can save time and money.

When purchasing a property, it is a good idea to have preliminary, exploratory conversations with city planning and zoning staff to discuss the site. This is a good way to learn what the city would be comfortable with.  The meeting will help the buyer understand what approvals will be necessary for the project and will assist in formulating a timeline for obtaining approvals.

Upon preparing the contract, the buyer should make the obligation to close contingent upon obtaining the necessary approvals. The approvals can be specific, but I like to keep them as generic as possible.  For example, I define “Approvals” as all approvals necessary to enable buyer to obtain building permits to construct the Intended Improvements.  When pushed, I will list approvals to include, without limitation, zoning, land use, platting, site plan, and I will expand as necessary.

Many times, going into the contract, the parties know precisely what zoning is going to be required, or the seller has already begun the process of re-zoning in anticipation of a sale for such a use. This should not affect buyer’s contingency as the use drives the value of the property and must be in place prior to closing.

Zoning diligence before contract can make negotiations smoother and faster. It can also help buyers and sellers set a realistic price for a property, particularly because with proper approval contingencies, buyers won’t have to close if the zoning is not sufficient for the intended use.  But patient sellers will be more likely to get their desired price.

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        When entering into a contract to purchase commercial real estate, experienced investors and developers generally understand that dozens of things could go wrong before the closing date that would prevent the closing from happening or could make the acquisition less than attractive, giving the buyer pause as to whether to close at all. As such, these buyers make certain that their contracts are well drafted and spell out all relevant provisions in detail. Their contracts contain explicit due diligence provisions and contingencies tailored for the specific transaction. All too often, I am faced with clients who are less sophisticated, anxious to make a deal and afraid they are going to “lose the property”. They push hard for me to back off important contract protections that could and will save them money and prevent litigation at a later date.

             Contingencies and due diligence are the 2 most important sections of any commercial real estate contract for a buyer. Taken together, these provisions can help the buyer determine whether the property is suitable for buyer’s intended use and whether the deal is feasible. They allow the buyer to assure that timing is adequate, that permits can be and will be obtained and that resources are in place. Therefore, it is critical that adequate time for due diligence be negotiated to allow the buyer to complete all tests, exams and evaluations. Contingencies might include approvals such as zoning, land use, site plan, environmental and financing. Other contingencies could be executed leases by a major tenant or sale of an existing property. Certainly, sellers will push back to shorten due diligence time periods and limit contingencies and the important thing for the buyer to remember and consider during this stage of negotiations is that the deal is not always such a “great deal”. If there is time to do inspections, it is possible to find that the property doesn’t suit the buyer’s needs. A zoning application can be denied, so if the contingency is waived or the time period is shortened, the buyer could be stuck with a piece of property it can’t use as intended so the property will have a lower value to the buyer.

             Buyers should work to protect their rights to the deposit. If a contingency fails and the contract is going to be terminated, the deposit should be returned to the buyer. But what if the buyer wants to continue with the transaction? Efforts should be made to extend the time period to satisfy the contingency rather than waive it and move forward. This can be accomplished by payment of extension fees that are smaller than the deposit. Often the extension fees are non-refundable but applicable to the purchase price leaving the deposit refundable in the event that the contingency ultimately fails. Sometimes, sellers insist upon the release of the deposit, making it non-refundable to the buyer. Buyer should then make every effort to have the deposit applicable to the purchase price at the time of closing and avoid payment of other extension fees. These principles hold true when buyer requests an extension of time of the due diligence period. Less is always more for the buyer.

             Of course there are dozens of other provisions in every contract which garner lots of attention in every transaction (and likely the subject of future posts). Buyers’ evaluation of a particular transaction should start long before contract execution and with the proper leg work, buyers will be in position to draft and negotiate due diligence and contingency provisions that work to their benefit.

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