Following his inclusion in a GlobeSt.com article discussing the rise of non-refundable deposits in multifamily transactions as a concession to sellers in today’s competitive market, Bass, Berry & Sims Gil Uhlhorn was quoted in another article detailing the important carve-outs buyers should include in agreements to mitigate the high risk of a non-refundable deposit.
“If a purchaser is willing to accept the potential risk that it will actually lose their deposit, there are certain important carve-outs that a purchaser must ensure are included in the contract so that its nonrefundable deposit is actually refundable in certain circumstances,” Gil said. “While it sounds contradictory that the nonrefundable deposit can actually be refundable, sellers generally accept certain limited carve-outs as no rational buyer would agree to shift the risk for certain diligence matters without a chance to review.”
Those carve-outs include seller default, casualty, condemnation, title survey and zoning matters, and environmental condition. “All sellers recognize that if they default, the purchaser should be entitled to a return of its earnest money deposit whether it has been classified as nonrefundable or not,” Gil said. “Similarly, in the case of a major casualty or condemnation, most sellers agree that a purchaser should be able to walk away with its earnest money if an event outside of the control or either purchaser or seller, like a casualty or condemnation, results in a material change to the property the purchaser agreed to acquire. The key with these carve-outs is to agree what is considered a major casualty or condemnation.”
Because buyers are also entitled to a clean title with no environmental issues, Gil suggested they ensure they have the ability to conduct a full title, survey and zoning analysis. However, sellers may seek to restrict these carve-outs by asking the buyer to review existing title documents, environmental assessments and other contract materials.
While these carve-outs may be resisted by sellers, a nonrefundable offer is still highly competitive. “Sellers can push buyers more in this current, competitive environment to agree to deal structures and deal points that are not what would have otherwise been considered market,” he added.
The full article, “The Essential Carve-Outs on Non-Refundable Transactions,” was published by GlobeSt.com on March 9 and is available online (subscription required).