How to Mitigate Risk When Waving Contingencies

With limited investment opportunities and high competition, investors are waving contingencies to win deals. Known as sign-and-go-hard transactions, these deals give an investors a competitive edge, but they are also higher risk. Still, buyers have options to protect against the inherent risk that comes with sign-and-go-hard deals.

“During purchase agreement negotiations, buyers can negotiate specific seller representations to insure against the risk they would typically investigate during the diligence period,” Alain R’bibo, a real estate attorney at Allen Matkins, tells GlobeSt.com. “Most purchase agreements contain “seller representations,” which are certifications regarding the condition of the property or the status of seller’s ownership, which, if discovered to be false, allow the buyer to terminate the purchase agreement and recover its deposit, notwithstanding the sign-and-go-hard nature of the transaction, or sue the seller and recover damages, including, potentially, reimbursement of diligence and legal costs, if the transaction closed prior to such discovery.”

These representations can address due-diligence concerns, adds Allen Matkins real estate attorney Shannon Snell. “Sign-and-go-hard buyers should negotiate representations which address key diligence-related concerns, such as the legal compliance of the property and its existing uses, the environmental condition of the property, the status of existing or pending litigation against the seller or the property, the status of entitlements and conditional use permits, and, if there are leases, the seller’s compliance with its obligations as the landlord,” Snell tells GlobeSt.com.

In addition, buyers may even be able to negotiate certain contingencies. These could include a limited title and survey review period. Negotiating these contingences will mean that buyers have the right to receive a refund of the deposit if a problem is discovered. “Standard purchase agreements typically incorporate the review of title and survey into the diligence period, and require buyers to notify the seller of any title and survey objections before the diligence period ends and the deposit becomes nonrefundable,” explains R’bibo.

Of course, buyers should remember that theses contingencies are still limited and will not protect against all risk, as a full due diligence review might. “While title and survey conditions do not cover all relevant diligence inquiries—they do not provide any information regarding environmental matters, physical condition, zoning, entitlements, and other issues relevant to the buyer’s assessment of the property—buyers must review title and survey to evaluate any recorded restrictions on use or rights of third parties which will affect their future ownership,” says Snell. “For example, if a third party has a recorded right to purchase the property, an easement runs through the middle of a building, or a meaningful part of the property encroaches on neighboring land, the property may be significantly less valuable or the acquisition may be riskier, and even a limited review period can provide substantial protections to the buyer.”