By:      Mary J. Drury

Financing contingencies in commercial purchase and sale agreements are common.  But in this day and age of securitized or “conduit” loans, which are commercial loans that are pooled together and in which interests are sold as securities (commercial mortgage-backed securities, or “CMBS”) in the capital markets, it is important to note that securitized loans cannot always be prepaid.  Additionally, it can be tricky to negotiate responsibility for financing approvals and allocation of costs.  Further, assumptions of existing loans often raise several negotiating issues.

A standard financing contingency, which assumes that a buyer will secure its own financing to pay off seller’s conventional  financing, might read:  “This Agreement is expressly contingent on Purchaser’s ability to obtain a commitment and funding pursuant to a loan (the “Loan”) on [terms acceptable to Purchaser] [the following terms:  ________________________] (the “Loan Contingency”).  In the event that the Loan Contingency is not satisfied within sixty (60) days of the date hereof, then [Purchaser or] [Seller] shall have the right, upon providing written notice to the other and Escrow Company, to terminate this Agreement, in which event, Purchaser shall receive a full refund of its Deposit.”  The blank and bracketed items are negotiable between the parties.

However, in a securitized loan, there is generally a “lockout period” (which is generally combined with “due on sale” and “due on encumbrance” clauses).  That means that Seller (as the current borrower under the loan) cannot prepay the loan for any reason or for any fee.  These periods often range from two to five years or more.  It is critical for a broker to inquire of its seller whether the property is subject to a securitized loan.  Thereafter, to release the lien, securitized loan documents provide for either defeasance, meaning that borrower may substitute government-backed securities to get the lien released from the real property, or yield maintenance, which basically requires borrower to prepay the interest the investors in the securitized market would have made, discounted to present value.  In conjunction with these, there is often a one percent fee.  Further, as to assumption, there if often yet another one percent fee, but only after expiration of the lockout period and only with the prior approval of the lender.

A financing contingency for a securitized loan where the buyer seeks to assume the loan might read:  “This Agreement is expressly contingent on Lender’s approval of Purchaser’s assumption of the $____ loan with _________ (the “Loan”) (the “Loan Contingency”).  Seller shall file with Lender on Purchaser’s behalf a request for the assumption of the Loan by Purchaser.  The application fee of $_________ due concurrent therewith shall be paid by ___________ and if Lender approves Purchaser’s assumption of the loan, the one percent (1%) assumption fee shall be paid by _______________________ at Closing.  In the event that the Loan Contingency is not satisfied within sixty (60) days of the date hereof, then [Purchaser or] [Seller] shall have the right, upon providing written notice to the other and Escrow Company, to terminate this Agreement, in which event, Purchaser shall receive a full refund of its Deposit [but not the application fee].”  Again, the blank and bracketed items are negotiable between the parties.

Finally, assumptions of non-securitized (conventional) loans raise many of the issues noted in the previous example, such as who pays costs, what is the timing of application and approval, and what happens if Purchaser is not approved.

The foregoing examples are a starting place for considering financing contingencies; you are urged to draft carefully any financing contingency on behalf of your client, taking into consideration the details of their transaction and any existing loan restrictions.


Category: Uncategorized

About the Author


Comments are closed.