What About the Agreement for the Sale of Commercial Real Estate’s Financing Contingency?

When you’re buying a house, you’d use a residential agreement of sale like PAR’s Form ASR, right? And if you’re buying a traditional commercial/industrial property (office building, warehouse, etc.), you’d likely want to use a commercial form that’s more like PAR’s Form ASC. But what if the property isn’t quite as clear – maybe a building with a storefront and a few apartments, or a four-unit apartment? Which PAR form would make the most sense in a transaction like that?  Our response is the classic, it depends. It depends on which form matches the transaction better. In order to make that decision, you must understand some of the differences between the two forms. A lot of the clauses are similar, but there are obviously some that are different. One of the clauses that differs is the financing contingency. 

What’s in the box? 

If you’ve called the PAR Legal Hotline about the mortgage contingency, you have probably heard us mention what is “in the box.” The box that we are referring to is the actual boxed out section of the contingency that includes the financing information. The actual box in the financing contingency in the commercial agreement has a lot less information in it. The only information requested is the loan amount, minimum term, type of loan and interest rate. Form ASC asks the buyer for less information about their proposed loan up front, which gives them more flexibility in the exact terms and conditions they could consider when looking for financing. 

Who can terminate? 

The largest difference between the commercial financing contingency and the residential mortgage contingency is who has the power to terminate if the buyer does not get a written commitment. In the commercial agreement, if the buyer elects the financing contingency and the buyer does not get a written commitment by the commitment date, either party has the right to terminate the agreement. This gives the buyer more power than in a residential transaction. However, keep in mind that there are still limitations. The buyer still has to cooperate with financing and cannot intentionally delay the financing application. Also keep in mind that the financing contingency box has less information in it, so it might be more likely that the buyer can get approved for what matches the box. 

What about the appraisal? 

The Appraisal Contingency Addendum (Form ACA) can still be used for the commercial agreement. If the buyer wants to have powers with the appraisal, they should be considering Form ACA. Again, keep in mind that the box in the financing contingency does not have all the information, so things like the loan-to-value ratio are not included. So, it is very possible that an appraisal could come in low, but the buyer could still get approved for financing. This could affect their right to terminate under the financing contingency. 

Lender-required repairs 

The residential mortgage contingency has a process for addressing repairs that the lender or insurer may require as part of the mortgage approval. The commercial financing contingency does not include anything regarding lender or insurer-required repairs. Parties can always negotiate, but if the repairs mean the buyer can’t get the loan, and the seller will not voluntarily negotiate, the buyer’s only remaining option is to accept or terminate. 

What is missing? 

You might notice the lack of information prior to electing the financing contingency. The Federal Housing Administration/Veterans Affairs amendatory clause box is not included in the commercial agreement because, typically, FHA/VA financing is not appropriate for commercial transactions. If you are looking to use the commercial agreement for a mixed-use property where the buyer is pursuing FHA/VA financing, it might be best to consider utilizing the residential agreement to cover all the bases. 

There are certainly pros and cons to either agreement, but the most important part is to make sure that all parties understand what they are. This allows all parties to make an educated decision as to which form to use given the specifics of a transaction.