Blog Ohio Real Estate Law / 10.26.2015

IF A CONTINGENCY CLAUSE DOESN’T FIT; SIMPLY ALTER IT.

Typically, sellers of real property want quick sales with no contingencies; want to sell “as, is”; and want no liability after the sale. Buyers, of course, usually desire the opposite: they want long diligence periods, and accordingly later closing dates; a host of warranties that survive the sale; and a number of contingencies (conditions to their obligation to purchase).
Custom (and positional negotiation) usually dictates closing dates with 30-60 day closings typical in residential deals, and 60-120 day closings typical in most commercial deals. Warranties are much more customary in commercial vs. residential deals, and contingencies are often found in all real estate deals.
Typical buyer contingencies in a residential deal include:
  • Financing (the right to terminate if buyer does not receive a commitment from a lender to loan required funds to make the purchase possible);
  • Sale of  Existing Property (the right to terminate if buyer’s existing residence or commercial property does not sell prior to the scheduled closing date for their purchase [many buyers of a new home/other property will not be able to qualify for a loan if they still own and owe money on their existing home/property]); and
  • Delivery of Good Title.
In addition to the aforementioned, typical contingencies in a commercial real estate contract include: 1) formal approval of the purchase/sale by a governing body; 2) confirmation of zoning conformance or receipt of a zoning variance; 3) all representations and warranties being true and correct in all material respects, as of the date of signing, and the closing date; and 4) there being no material change in the condition or status of the property between the contract date and the closing date.
Many sellers are reluctant to accept offers with contingencies. More often than not, however, sellers take such a hard line risk holding on to their property a lot longer than desired.
Why? Contingencies are easily qualified. In general, contingencies should provide: 1) a specific date or time period (for the occurrence or non-occurrence of the conditional event); and 2) an obligation to use good faith to pursue action likely to lead to satisfaction of the conditional event.  With financing contingencies, for example, the risk of buyers having unreasonable expectations of qualifying for a loan can be minimized by specifying a reasonable percentage of purchase price to be financed (e.g., 80% or less), and maximum interest rate sought by Buyer.
To qualify the “Sale of Existing Property Contingency”, or really, any contingency, consider the following “Right to Market/72 Hour Put” clause:
Seller and/or its agents may continue to market the Property during the contingency period. If, however, Seller and/or its agent receives a bona fide offer for the purchase of the property (without  a _____________contingency) which Seller is willing to accept, Seller shall give Buyer notice within twenty-four (24) hours of such offer, together with a copy of such offer (“Seller’s Notice”). Within three (3) days of Buyer’s receipt of Seller’s Notice, Buyer may notify Seller in writing of Buyer’s willingness to purchase the property for the price and on the terms set forth in Buyer’s purchase agreement with Seller, except for the ___ contingency (“Buyer’s Notice”). If Buyer issues such Buyer’s Notice to Seller, as and when required, such Buyer’s Notice shall act to nullify the _____ contingency and the parties hereto shall be required to perform their obligations under this Agreement as though the contingency had not been contained therein. If Buyer notifies Seller that it is unwilling to purchase the property without the ____contingency, or fails to respond as and when required herein, Seller may accept such bona fide offer, in which case the earnest money deposit shall be returned to Buyer, and thereafter neither party shall have any liability to the other.”
With the above provision, buyers won’t be locked into a deal without their contingency. Their worst case scenario would be having to walk away from the deal, without penalty. Sellers, on the other hand, won’t need to feel obligated to take a “hard line approach” and refuse a deal with contingencies. A seller’s worst case scenario in this example would be having to wait three (3) days before knowing if it can terminate its contingent deal with its original buyer (if the original buyer does not agree to remove its contingency), and accept a better deal, without contingencies.
What is the moral of this story? Instead of walking away from a contingent deal, if the contingency clause doesn’t fit; simply alter it.