Contingencies in Commercial Real Estate Contracts

Most real estate contracts contain “contingencies,” which allow you to walk away from the deal without penalty. If the conditions written in the contract are not met, you can withdraw from the entire contract as if it never happened.

Reason for Contingencies in Real Estate Contracts

Contingencies offer you protection by requiring the performance of the conditions you negotiated into the contract. Yes, you can back out and use the nonperformance of the contingency as your reason. But, you can also use the written requirement incorporated into your agreement as a negotiating tool for further negotiation. Your new “contingency” might better serve you by offering you an even better deal after nonperformance of the prior condition.

Examples of Contingencies in Real Estate Contracts

Examples of contingencies in a contract to purchase commercial property include the following:

(1) Mortgage Contingency – You are able to get a mortgage loan of at least 75% of the purchase price.

(2) Inspection Contingency – You require a contractor to inspect the condition of the building and are satisfied with the contractor’s report. Another example is your determination after inspection that the building can be renovated to your satisfaction.

(3) Other Sale Contingency –  You require the successful sale (or purchase) of a different piece of commercial real estate. This contingency is often seen in purchase contracts in which the sale of the first piece of real estate is meant to finance the sale of the second piece.

Getting Help with Contingencies in Real Esate Contracts

Your commercial real estate lawyer can help you determine the right contingencies to put in your commercial building contract as well as draft the best language to cover your comditions for executiom of the agreement.

Case Studies: Contingencies in Commercial Real Estate Contracts

Case Study 1: Mortgage Contingency

Sarah is interested in purchasing a commercial property for their new business venture. They enter into a contract with the seller, including a mortgage contingency that requires them to secure a mortgage loan of at least 75% of the purchase price within 30 days.

However, due to unforeseen changes in the lending market, Sarah’s loan application is denied by multiple lenders, making it impossible for them to fulfill the contingency.

As a result, Buyer A exercises the mortgage contingency and withdraws from the contract without any penalties.

Case Study 2: Inspection Contingency

John is considering purchasing an office building for their expanding company. They include an inspection contingency in the contract, which allows them to have a licensed contractor thoroughly inspect the building’s condition.

During the inspection, several structural issues are discovered, raising concerns about the building’s safety and potential renovation costs.

Dissatisfied with the findings, John invokes the inspection contingency and terminates the contract, protecting themselves from an unfavorable investment.

3. Case Study: Other Sale Contingency

A buyer intends to buy a retail space for their expanding chain of stores. They have a specific budget and require the successful sale of their existing store to finance the purchase of the new property.

In the contract, they include an other sale contingency stating that the contract is contingent upon the successful sale of their current store within 60 days.

Unfortunately, the buyer fails to find a suitable buyer for their existing store within the specified timeframe. Consequently, they exercise the other sale contingency and cancel the contract, avoiding a potential financial burden.