Jul 162013

Beware of Open Ended Contracts

Who says that contracts are always fair? Both parties in a transaction should protect themselves.

Setting the time lines in a contract for the sale and purchase of commercial real estate or the leasing of commercial real estate is one of the most important things to take care of in the contract. Every item that has a start date, should have a finite end date.  Sellers and Buyers should be on the lookout for this. A Buyer or their attorney may insert clauses that tie up their property indefinitely. For instance, in a development property transaction a clause like “Due Diligence period will terminate when permits are received” What happens if the permits are delayed due to a faulty application or poor plans submitted by the Buyer.

I saw a similar clause for a commercial lease. The Buyers attorney prepared the contract that had the rent commencement date as the date that the tenant received a Certificate of Occupancy. The Landlord was desperate to lease the property and did not even want to have his lease reviewed by his attorney. He just wanted a tenant. Fortunately for the Landlord, we had the Tenant execute an addendum to the lease saying that if permits were not received within six months that the Tenant would commence paying rent.  Six months is much more than fair. This was supposed to be a far off event that would never happen. Well it is now one year later and the Tenant has not yet received a certificate of occupancy.  The landlord is receiving his rent, only because he put a time-line on the event.

The Purchase And Sale Contract and the Lease Contract are long documents. It is a good idea to extract all the relevant dates from the contract and create a spreadsheet listing the date that all events start and the date that each event terminates.  This document should be signed by both parties to the transaction. It is possible that the spreadsheet may address an issue that is omitted in the contract. As an example, I was recently involved in a contract to purchase a building. The contract that the attorney prepared did not address the date by which the Buyer had to obtain financing. This was however addressed in the spreadsheet. When the date for receiving a financing commitment came and went,  the Seller had the option to terminate and not be held in limbo because he had taken the time to set an end date.

Of course, it works both ways. Buyers and Sellers should have time-lines during which they must perform their obligations. Any by the way, although an attorney is not required, it is always a good idea to have your attorney review the documents, especially for a lease. Spend a little now to save a lot of money later.