Contingencies are an investor’s safety net in commercial real estate contracts. When you and the seller sign a purchase agreement, you both commit to the deal. However, by including contingencies, you create specific requirements that each party must fulfill before finalizing the sale.
These clauses help you move forward with a transaction while protecting your interests and managing risks. More importantly, they give you a clear way to exit the deal if either party can’t meet certain requirements within an agreed timeframe. While every purchase agreement is different, it’s important to look out for four essential contingencies before signing.
Due diligence contingency
The due diligence contingency allows you to fully check the property before buying it. For commercial real estate transactions in New York, this period can be anywhere between 30 and 60 days.
This contingency is your chance to find any possible issues that can affect the property’s value or how you plan to use it. If you find any deal-breakers, such as major structural damage or zoning restrictions, that prevent your intended use, you can walk away from the transaction without penalty.
Financing contingency
A financing contingency is essential if you’re relying on a loan to purchase the property. This clause makes the purchase contingent on your ability to secure financing under specified terms. For instance, it might state that you can back out of the deal if you can’t obtain a loan with an interest rate below a certain percentage. This protects you from being bound to purchase a property you can’t afford if your financing falls through.
Environmental contingency
An environmental contingency protects you from hidden hazards. It gives you time to hire professionals who can thoroughly inspect the property for issues like:
- Soil contamination
- Asbestos
- Underground storage tanks
If they discover significant problems, you can negotiate repairs, ask for a price reduction or walk away from the deal. This is crucial in New York, where many buildings have industrial histories.
Title contingency
A title contingency protects you from issues with the property’s ownership history. It allows you to review the property’s title and ensure it’s clear of any liens, encumbrances or disputes.
Don’t leave your investment to chance
Considering a commercial real estate investment? Don’t overlook the importance of legal review. An attorney can help you review contingencies and ensure your purchase agreement serves your best interests.