When Oscar Wilde wrote the words, “Man can believe the impossible, but man can never believe the improbable,” he had something in mind other than the demising events of Enron and Lehman Brothers.
One of the risky habits developed by many buyers during the real estate bubble was that financing contingencies were conditional solely on receiving a "commitment letter" from a bank. The commercial real estate industry’s new norm was for buyers to bear the risk of a bank being able and/or willing to fund at closing.
The reality of the capital markets is that banks may fail or withdraw financing even after a commitment is issued. Industry experts predict approximately 100 bank failures this year. A leading commercial real estate brokerage firm recently had the sale process of an office building imperiled when the bank providing loan commitments for this potential transaction collapsed.
Not to be that guy, but if the seller agreed to a financing contingency, why should the buyer risk a costly litigation battle over a deposit if a bank fails to deliver on its commitment letter? We’re in a buyer’s market!
As leading real estate attorney Peter Sorokin of Rogin Nassau in Hartford, CT writes, “P&S contracts often contain a financing contingency that permits the buyer to terminate the contract and recover its deposit back if a commitment letter is not obtained by a certain date. In today's uncertain environment, consideration should be given to expanding the contingency to provide that buyer's deposit will be returned in the event the lender defaults on its commitment and doesn't close.”
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