When buying commercial property in Colorado with the assistance of a broker, more likely than not the state approved Contract to Buy and Sell Real Estate (Commercial) will be used.
This and the subsequent column will cover some of the more important aspects of that contract. If the reader cares to follow along, a copy of the contract noted above (CBS 2-7-04) can be downloaded from the Colorado Real Estate Commission Web site at www.dora.state.co.us/real-estate/contracts/CONTRACTSII.htm.
Right at the top of the contract is a bold disclaimer in all caps suggesting the parties to the contract should seek counsel before signing the contract. In any commercial transaction, it goes without saying that all parties should thoroughly understand the contract and its various implications.
It is so important that the suggestion is repeated several times in the contract.
On the first page of the contract is a table of deadline dates which can be intimidating and ominous to some. The table is really quite easy to interpret.
For each enumerated event, there is a reference section provided. For example, the reference for Loan Commitment Deadline is § 5b. In the body of the contract, that section goes in to specific detail about the Loan Commitment, what is required and what the consequences can be if the date is not met.
Each of the events noted in the table on the front page can be investigated by simply referring to the specific section of the contract.
The dates in the table cannot be taken for granted or allowed to “slip” a day or two without risking some unwanted consequences. In § 20, it specifically states “Time is of the essence hereof.”
If a date is missed, the unintended consequences may be default, accepting the property as is, or even being required to buy the property.
Because there can be a lag time between presenting an offer to the seller and getting a signed contract, some brokers will actually put a number in the deadline column instead of a date.
That number is usually identified as a number of days after the execution of the contract by both parties. For example, 45 may be on the Loan Commitment Deadline which means the deadline for the Loan Commitment is 45 days after the date the contract was accepted by both parties.
If a contract is received with such numbers, as soon as practical, the numbers should be translated to specific dates so all parties may accurately track the deadlines.
The next table that is seen is in § 4. That table breaks down the purchase price for the transaction.
As with the table on the first page, this table also has a reference column so there should be no misunderstanding as to what each item entails. The total dollar figure in each column on line 10 of the table should equal each other.
In addition to the figures being equal, they should also be the same as the dollar amount noted on page one in the upper right corner of the contract. The contract specifically notes that if there is an inconsistency between the amounts on page one and page two, the amount in § 4 shall control.
Part of the reason it is so critical to adhere to the dates in a contract is because of the opportunities for the buyer to get out of the contract or for the seller to have more assurance that the transaction will actually close.
The Loan Commitment date is one such date. In § 5b, the buyer is specifically required to provide written notification that a loan cannot be obtained. If such notice is not received by the seller and the buyer does not close the transaction, the buyer “…SHALL BE IN DEFAULT” (emphasis is actually in the contract). How a default by the buyer is handled will depend upon which check box is selected in § 20.
Most contracts seem to use the second box, Liquidated Damages.
This section essentially states the seller’s only remedy in the case of a buyer default is to retain the buyer’s earnest money. Some contracts use the first box, Specific Performance. This section can rain on the buyer’s parade.
If that box is checked, the seller may elect to cancel the contract or the seller can have the right to specific performance (in essence force the buyer to close) or damages, or both. That can be very detrimental to the buyer in the case being discussed here.
If the buyer was not able to obtain financing, he probably does not have the money to buy the property. However, the Specific Performance section of the contract may force him to do just that or pay damages. More likely than not, either of these scenarios will be significantly more costly than the earnest money that was provided at the initial signing of the contract.
Exactly which box is checked is a matter of negotiation. However, in general, a buyer would probably prefer to check the Liquidated Damages box; while a seller would probably prefer the Specific Performance box.
Regardless of which one is selected, it should be plain that either may have unintended consequences for the parties if the deadline dates are not followed.
Terry L. Vice is the managing broker of Hoff & Leigh Management Inc. If you would like to see a topic addressed you may contact him at 630-2277 or TLVice@TLVice.com.