The Essential Carve-Outs on Non-Refundable Transactions

Nonrefundable offers have become a popular way for investors to win apartment deals amid ever-increasing competition for opportunities. While providing a nonrefundable offer—meaning the deposit is nonrefundable—is a successful strategy to secure a property, the are high-risk to the buyer. T. Gaillard Uhlhorn, member at Bass, Berry & Sims PLC, however, says that there are several essential care-outs that buyers should include to help mitigate risk while maintaining a competitive advantage.

“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,” Uhlhorn tells GlobeSt.com. “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 limited—but crucial—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,” says Uhlhorn. “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 of 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.”

Buyers are also entitled to a clean title with no environmental issues, making a full title, survey and zoning analysis necessary. “Ideally, a purchaser would have the ability to conduct full title/survey/zoning analysis and to review an updated environmental report after contract execution with a refund of the nonrefundable deposit if the results of that diligence are not acceptable to purchaser,” says Uhlhorn.

Some sellers may seek to restrict carve-outs by requesting the buyer review existing title documents, environmental assessments and other contract materials. “If a purchaser and seller agree to this approach, the seller should have the existing reports available and ready to share with the purchaser, and both purchaser and seller must accept that the time necessary for the purchaser and its counsel to review of the existing reports will delay the contract execution,” adds Uhlhorn.

Even with these carve-outs, a nonrefundable offer is still 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.