Deadlines & Consequences
August 1, 2019
Kristin E. Rosan
Partner, Madison & Rosan, LLP Attorneys at Law
In reviewing a real estate purchase contract today for a client, I realized that this simple lesson equates to an important tool in professional practice. What are the deadlines and consequences?
We are all familiar with standardized lease agreements or purchase contracts, filling in the all too familiar blanks for the purchase price, address, financing, and due diligence deadlines. In these sections, the deadlines and consequences are built into the form contract. For example, a buyer has 60 days to complete environmental, and if the buyer is not satisfied, they must terminate the purchase agreement. The deadline and consequences are clear, the buyer has 60 days to inspect and terminate. Both the buyer and seller have an expectation of what is to occur and when. However, what happens if you add in an additional requirement or contingency to the purchase contract? Tip: For each obligation, make sure you include a deadline and a consequence.
In the current market, we see more due diligence contingencies added to purchase contracts. Any problems with the following contingency? “Purchase Contract contingent on seller rezoning the property for commercial use.” What happens if the rezoning is denied? Does the buyer have a right to terminate and if so, how long does the buyer have? Can the buyer renegotiate the purchase price? Does the seller have a right to terminate? Unfortunately, the contingency as drafted leads to more questions than answers.
“Purchase Contract contingent on seller rezoning the property for commercial use. If the rezoning is denied, the buyer may (i) terminate the purchase contract by delivering written notice to seller or seller’s agent, or (ii) notify the seller or seller’s agent in writing and renegotiate the purchase price. If the parties are unable to reach an agreement on a new purchase price, the buyer may terminate the purchase contract by delivering written notice to the seller or the seller’s agent. In any event, if the buyer fails to terminate within 15 days of closing, this contingency shall be deemed waived.”
I know what your immediate reaction will be, that is too long. I agree. But length aside, if the property is not rezoned, the sample addresses clearly what is to happen and when it is to happen. If the buyer wants to proceed anyway, the buyer does nothing. However, the buyer also retains the right to terminate and the buyer and seller retain the right to renegotiate. All said the buyer’s rights are limited in time, benefiting both parties.
What about a request to remedy an unsatisfactory condition discovered during due diligence? I worked on a case not long ago where a dispute arose between the buyer and seller about the quality of the remedy repairs and the pre-closing inspection. The sellers argued they completed the remedy repairs in a workmanlike manner. The buyer felt the buyer could terminate after the pre-closing walkthrough. Ultimately the closing failed, and the parties ended up in litigation. When negotiating a remedy, consider a reduction in the purchase price to cover the cost to repair. Such benefits the buyer and the seller and avoids the risk of squabbles over repairs. If you do negotiate a remedy, include a deadline for completing the repairs. Your buyer may want the repairs to be conducted by a licensed professional and have the seller provide receipts. Your buyer may also want to reserve the right to inspect the repairs. Keep in mind for each obligation there should be a deadline and consequence. What happens if the repairs are not completed timely?
Your clients are relying on your experience in the industry to make them aware of what can go wrong resulting in a failed transaction. It will always benefit a client to have an expectation of what is to occur and when. Remember when drafting contingencies in any agreement, ask, “what are the deadlines and consequences?”.