NEGOTIATING IN A
by Andrew Kirsh
sense would dictate that such a contract
would be rejected. But, for over a decade,
during the sizzling real estate market,
contracts such as this were not uncommon when sellers dictated most, if not all,
material terms of a real estate acquisition.
In today’s market, however, the number
of real estate transactions that make
economic sense is dwindling. Fewer
buyers are able to obtain adequate
financing due to the recent credit crunch.
Thus, an imbalance between seller
“ supply and buyer demand now exists in
The return of the real estate market. The negotiating
pendulum long thought to be stuck at the
balance due to top of the seller’s side is finally returning
to an even position. The return of balance
the changing due to the changing market should allow
buyers to negotiate more favorably
market should certain hot button issues concerning due
diligence, deposit, as-is and release provisions, representations and warranties,
allow buyers and seller remedies.
to negotiate DILIGENCE AND DEPOSIT
In the past, sellers were able to nego-
more favorably tiate the terms of a purchase contract
such that buyers would close transactions
without any meaningful diligence. Conse-
certain hot quently, too often at the closing table buy-
”ers were left wondering: Can this building
button issues. survive an earthquake? Will the roof hold
up after the next significant winter storm?
If not, is the property properly zoned so
that it can be rebuilt? Rather than feeling
insecure, buyers in today’s marketplace
may see a return to normality with sellers
providing a reasonable period to perform
diligence on the underlying real estate.
Bargaining for a longer diligence
period, however, raises other issues
concerning the posting of deposits and
the distribution of the purchase price to
sellers. It had become commonplace
for sellers to require that a portion of the
A seller puts its multi-million dollar,
multiple-occupant retail shopping center
with certain structural and environmental
challenges up for sale. The property is
offered on the following terms: the seller
provides no representations about the
asset or its condition; the buyer is given
seven days of due diligence to discover
the condition of the property; the buyer
must make a hefty, non-refundable
deposit go hard before the expiration of
the due diligence period. Today’s market
suggests that there are a few transactions
in which buyers are able to post deposits that are refundable through the due
diligence period.
deposit; and the asset is sold in an as-is
condition with disclaimers by the seller
for all actual or potential defects. In other
words, the seller doesn’t tell the buyer
the condition of the property, doesn’t
provide the buyer a reasonable opportunity to discover the condition of the property, and then prevents the buyer from
any recourse should a defect be found
after the purchase is closed. Common
“AS IS” AND RELEASE
In every purchase agreement, buyers
are confronted with seemingly dozens of
pages of BOLD TEXT IN ALL CAPITAL
LETTERS warning them of everything that
is, or could be, wrong with the property.
During the last decade, these sections
tended to get longer and more comprehensive, with sellers reciting all potential
defects in the purchase agreements in
order to insulate themselves from the
possible recourse of the buyers. The as-is
and release provisions were often used
to insulate sellers from liability for existing environmental and archaeological
discoveries. If it is later discovered that
the purchased property rests on top
of a waste site filled with hazardous
substances or above a Native American
burial ground – things that might have
been discovered with a reasonable due
diligence period - buyers are out of luck.
In today’s changing market, these provisions may be called into question. Even
if buyers are able to squeeze a longer
window of diligence out of sellers, buyers
cannot be expected to have complete
knowledge of a property’s deepest and
darkest secrets, especially in situations
where sellers have owned the property
for a substantial period of time. Given the
pro-seller environment over the last 10
years, sellers are going to be reluctant to
accept such a paradigm shift in the terms
of their purchase contracts and will continue to desire to place the diligence
risk on buyers. However, it remains to be
seen how these provisions will withstand
an even greater swing in the market.
