When negotiating the purchase of commercial real estate most contracts provide a feasibility period after the contract is signed (aka the effective date) for the buyer to study & analyze the property to ensure there are no defects. It’s important for buyers to perform this due diligence to ensure the property is in good condition and that it makes business and financials sense, all while maintaining the right to cancel the contract if the results are unsatisfactory.
The feasibility period allows a buyer to terminate a contract for any reason within a certain number of days (which is negotiated) after the effective date by giving the seller written notice of termination. Typically for the buyer to have the option to cancel they must pay some money (amount negotiable however can range from 1% to 4% of purchase contract). If the contract is terminated by the buyer before the negotiated number of days then their earnest money will be refunded, however MINUS the negotiated amount of money the buyer agreed to to pay for the unrestricted option to terminate the contract. If the buyer does not terminate the contact then the consideration amount will be credited to the sales price at closing.
How Long is The Feasibility Period?
The feasibility period in commercial real estate is negotiable between the buyer and seller and determined during the contract negotiations. For simple commercial real estate purchased the feasibility period maybe 30-45 days. A simple commercial real estate transaction might be an office condo. For more complex projects such as buying a piece of land to develop an office building or retail center feasibility periods can be many months (e.g. 6-12 months). Again there is no specific time frame as feasibility periods are negotiable. If you are buying commercial property then you want as long a feasibility period as possible. If you are the seller then the shorter the period the better.
When Does the Feasibility Period Start?
As a buyer of commercial property you should negotiate to have the feasibility period commence after the seller has provided all of the necessary documents (see below). Sellers will want the due diligence period to begin after the contract is signed. Buyers are going to spend a lot of money on the due diligence process so you want to ensure it does not commence until you have all of the documents needed to conduct a thorough analysis of the commercial property.
Documents Buyer Needs From Seller to Conduct Due Diligence
Before being able to conduct the due diligence it’s important that the Buyer receive the following documents from the seller within a certain number of days after the contract is executed:
- Title reports
- Property studies & surveys
- Environmental studies in Seller’s possession
- Soils reports
- Leases
- Maintenance records
- Violation notices
Example Feasibility Period Language
(a) After the date of acceptance of the Agreement by Seller, Purchaser, its agents and employees shall have the right to enter the Property to conduct all inspections. All such entries upon the Property shall be at reasonable times during normal business hours and after at least 24 hours prior notice to Seller’s agent, and Seller or Seller’s agent shall have the right to accompany Purchaser during any activities performed by Purchaser on the Property. If any inspection or test by or at Purchaser’s request disturbs the Property, Purchaser will restore the Property to the same condition as existed before the inspection or test.
(b) Purchaser shall have a period of thirty (30) days from full execution of a contract (the “Due Diligence Period”) to conduct a due diligence review of the Property. Subject to certain limitations to be included in the Agreement, during the Due Diligence Period, Purchaser and its agents shall have the right to enter the Property for the purpose of making inspections thereof and conducting tests and observations at Purchaser’s sole risk, cost, and expense. If, before the expiration of the Due Diligence Period, Purchaser determines that the Property does not meet Purchaser’s requirements, Purchaser shall notify the Seller in writing and the Contract shall be terminated, except for those provisions which by their terms survive a termination of the Contract, and the full Earnest Money shall immediately be returned to Purchaser minus $500.00 for consideration of this Contract.
Seller shall provide any of the following in the seller’s possession to the Buyer:
- Property studies & surveys
- Soils reports
- Environmental studies in Seller’s possession
- Title reports
- Maintenance records
- Leases
- Violation notices
- Etc
If you have any questions about buying commercial real estate for sale in Austin, Tx feel free to give us a call at 512-861-0525
