Four Common Contingency Clauses in Commercial Real Estate Contracts

Generally speaking, the goal of anyone selling commercial real estate in the Tacoma area or elsewhere is to get a “clean” purchase and sale contract containing a quick closing date. By “clean,” real estate attorneys generally mean a contract that does not contain an inordinate number of contingencies. If an offer to purchase is contingent upon the alignment of a host of different factors, one is left to wonder if one has been given an offer at all.

Most commercial real estate contracts do contain contingencies – some developers think of them as parachutes, allowing the proposed purchaser to walk away in the event important details don’t get worked out. Here are four common contingency clauses that appear in many commercial contracts.

Financing Contingency

In most situations, the buyer does not have sufficient cash on hand to purchase the commercial property without securing some level of financing. Accordingly, closing is made contingent upon the purchaser’s securing a loan of a specified amount, at a specified maximum rate of interest, and for a specified period of years (e.g., a ten-year amortization). The seller should pay careful attention to the terms of this contingency. Before accepting the offer, talk with a banker or other lender to determine if the contingent terms are realistic. For example, if the offer is contingent upon the purchaser’s obtaining 100 percent financing, you may not have much of an offer. Make sure there is an appropriate time limit on the securing of financing.

Inspection Contingency

Unless the property is undeveloped, the purchaser will likely include a contingency clause requiring the property to pass an inspection as to its condition. Care should be given in describing what standard is to be used to determine if a building passes the inspection. For example, a 30-year-old facility should not be judged with the same standards as one that is new or nearly new.

Zoning/Land Use Contingency

Any purchaser has an intended use for the property. From the purchaser’s standpoint, if the current zoning or land use restrictions do not allow such an intended use, the property is not satisfactory. Many contracts, therefore, include a contingency that requires the seller to provide some sort of certification that the property is zoned in a manner that meets the purchaser’s needs.

Title and Survey Contingency

Just as a physical inspection of the property is important, a legal “inspection” related to the title of the property is generally required. One often deals with a “double” contingency here. That is to say that a purchaser will generally not be able to arrange for financing unless the title to the property is acceptably clean and clear.

One should not forget about surveys. Are there fences on the property? One needs to be concerned about whether their location is legally appropriate. Surveys also ordinarily disclose the location of utility easements and other encumbrances. A survey contingency is quite common in commercial real estate contracts.

Commercial Real Estate Contracts Usually Involve Complex Legal Issues

In commercial real estate, like so many other areas of the law, the “devil is in the details.” Subtle word choices within a commercial real estate contract can make a significant difference in whether an offer is legitimate or not. Even experienced real estate developers and owners find that it is crucial to seek the counsel of a strong, experienced legal team.

That is the type of legal counsel that you will find at Bolan Law Group. We have years of combined experience handling a full range of commercial real estate law. We have represented sellers and buyers in many sorts of transactions. Our depth of knowledge allows us to provide our clients with superior representation. We work collaboratively – sharing strategies, ideas, and experience. Our team of attorneys and staff is big enough to handle your matter, yet we are small enough to provide you with the most personal legal service possible. We pride ourselves on designing the simplest, most effective solution for your legal issue. For assistance with any sort of real estate issue, contact us on the web or call our office at (253) 470-2356.

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