Financing Contingencies and Lender Protections in Commercial Purchase Agreements

Purchase and sale agreements for commercial real estate allocate risk between the buyer and seller through a combination of representations, covenants, conditions precedent, and termination rights. One area where this risk allocation often becomes particularly important is financing.

While many commercial contracts rely on a single due diligence period during which the buyer must complete all of its investigations—including its assessment of financing availability—some transactions include a separately negotiated financing contingency. Understanding when a financing contingency is appropriate, how it differs from ordinary due diligence, and how it should be drafted is critical for both buyers and sellers.

The Typical Due Diligence Framework

In a standard commercial real estate purchase agreement, the buyer is granted a defined due diligence period. During that period, the buyer is expected to investigate and evaluate all aspects of the transaction, including:

• The state of title and survey matters
• The physical condition of the property
• Environmental conditions (Phase I reports, and where applicable, further testing)
• Zoning compliance and land use restrictions
• Existing leases, service contracts, and operating documents
• Any other matters that could affect the value or use of the property

In many contracts, the buyer is also expected to satisfy itself regarding the availability and terms of any required financing—both debt and equity—during this same due diligence window. If the buyer fails to terminate the contract before the expiration of due diligence, the buyer typically proceeds toward closing without further contractual protection if financing later proves unavailable.

When a Separate Financing Contingency Is Negotiated

In some transactions, however, the parties agree to carve out financing as a separate condition precedent to the buyer’s obligation to close. This financing contingency operates independently from the general due diligence period and is specifically tied to the buyer’s ability to obtain financing meeting defined criteria.

A financing contingency generally provides that if the buyer is unable to obtain the specified financing by a stated deadline, the buyer may terminate the purchase agreement and receive a return of its good faith deposit.

From a seller’s perspective, agreeing to a financing contingency means accepting some degree of execution risk beyond ordinary due diligence. As a result, these provisions are often heavily negotiated.

Key Elements of a Well-Drafted Financing Contingency

A financing contingency should be drafted with precision. Ambiguous or open-ended provisions tend to create disputes and undermine deal certainty. At a minimum, a well-drafted financing contingency should address the following points clearly.

1. Defined Financing Terms

The contingency should specify what financing the buyer must obtain. This may include:

• The loan amount or minimum proceeds
• Maximum interest rate or rate structure
• Amortization period and maturity
• Permitted lenders or lender categories
• Acceptable conditions to closing

The goal is to define financing that is commercially reasonable for the transaction without giving the buyer unfettered discretion to reject available loan terms.

2. Express Outside Date

The financing contingency should include a clear outside date by which the buyer must obtain the required financing. If that date passes without satisfaction of the condition, the buyer’s termination rights should be unambiguous.  However, if the buyer fails to timely exercise its termination right, the termination right should expire and the Buyer should thereafter be obligated to complete the purchase.

3. Buyer Obligations and Diligence Standards

Most sellers will require the buyer to take affirmative steps to pursue financing. These obligations often include:

• Applying to multiple institutional lenders
• Submitting complete and accurate loan applications
• Promptly responding to lender requests
• Diligently prosecuting the financing process

Well-drafted provisions spell out these requirements and condition the buyer’s termination right on compliance. This prevents a buyer from relying on the contingency without having made a good faith effort to secure financing.

4. Deposit Treatment Upon Termination

The financing contingency should clearly state that, upon a permitted termination, the buyer is entitled to a return of its deposit, provided the buyer has complied with its obligations under the contingency.

Interaction with Lender Requirements

Even where a financing contingency exists, lenders frequently impose their own conditions that can affect timing and closing risk. These may include:

• Updated environmental or engineering reports
• Title endorsements beyond standard coverage
• Estoppels and subordination agreements
• Post-closing reserve requirements or guaranties

Buyers should evaluate whether these lender-driven requirements can realistically be satisfied within the contract timeline and ensure that the financing contingency is coordinated with other closing conditions.

Balancing Certainty and Flexibility

From a drafting perspective, financing contingencies reflect a negotiated balance. Buyers seek flexibility to avoid closing without financing, while sellers seek certainty that the transaction will close as scheduled.

In competitive markets, sellers may resist financing contingencies altogether or require higher deposits, shorter contingency periods, or more stringent diligence obligations. In other circumstances, a carefully structured financing contingency can allow a transaction to move forward where it otherwise might not.

Conclusion

Financing contingencies are not appropriate for every commercial real estate transaction, but when they are used, they should be drafted with clarity and discipline. A well-structured financing contingency defines the required financing, imposes meaningful diligence obligations on the buyer, establishes a firm outside date, and clearly addresses deposit treatment.

Careful attention to these provisions can reduce uncertainty, align expectations, and help avoid disputes as the transaction moves toward closing.