By Javier A. Lopez and Stephanie M. Gomez
July, August 17
The fully executed contract is ready for signatures. All too often, however, the end is not near. Instead, the game of chess begins.
With the commercial and real estate markets in flux, more real estate litigation is happening because buyers and sellers are trying to back out of closings. To help prevent an escape hatch, prepare beforehand and draft the most airtight contract possible.
Real estate investors and professionals must have safety valves placed into a sale and purchase contract, first gently and then more rigorously, to remind the buyer about the pain of backing out. Various options are available on how to dissuade a reluctant buyer from not signing a contract.
Before beginning to write a contract, prevention involves several steps. While it may sound obvious, including the closing date is crucial.
Also, a seller should specify the length of allowed extensions, limit the number of extensions, and decide on the ramifications for each extension. For example, an extension may call for a nonrefundable deposit.
If a buyer walks, he loses the property. Another option is to specify additional escrow money for each requested extension.
The agreement should specify that the deposit is held in escrow, which will be provided to a seller if a buyer walks away. Prior to closing, sellers should try to have as much money as possible on their side of the table – a significant enough amount to place a buyer in a tough spot.
Free and Clear Titles
Property must be able to be transferred with a clear title. A seller, however, may be aware of certain issues with the title and may require the buyer to assume them. In this instance, sellers must be very clear about these issues in the contract.
In a recent litigation, the buyer tried to back out of a $38 million closing allegedly due to an open litter violation against a commercial tenant. The litter consisted of a piece of plywood lying against the property’s side wall, which merely needed to be tossed in the garbage. In reality, the buyer’s concern was that the property value had dropped to $33 million.
To identify red flags from a buyer, a broker and seller must pay attention to changes in a buyer’s behavior. For example, a buyer may start communicating less frequently or continually request extensions of the closing date.
If a seller notices these changes, he should discuss them with the buyer. He also should create a comprehensive paper trail showing his adherence to the contract and write every communication as if it is going to be used as an exhibit for litigation.
If a buyer fails to remit the balance of the purchase price to the escrow agent and fails to close in a timely manner, the seller should immediately send a letter showing the default and exercising his right to terminate the agreement and retain the deposit. Should this result in litigation, the seller will be well-equipped to successfully defeat a buyer’s claims.
Reaching the Finish Line
Thinking moves ahead is important in a chess game and in closing a deal. Unforeseen circumstances, however, are a part of the process. Commercial real estate professionals should always review the draft contracts, while keeping potential litigation in mind. For any questions, they should ask the real estate attorney.
Typically, the contract will be the most scrutinized document in this type of litigation. Having safety valves in place, a clean and easily understood contract, and mechanisms to make the other side think twice before backing out will help keep the closing on track. For those engaged in a transaction, it is essential to maintain communication throughout the closing process. Following these steps will prevent the necessity of wasting time and money in litigation.
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