Financing Contingencies in Commercial PSAs: When a Separate Financing Out Is Worth the Fight

Many commercial real estate purchase and sale agreements provide for a single due diligence period during which the buyer is expected to complete its review of the property and either proceed to closing or terminate the contract and recover its deposit. That diligence process typically includes an investigation of title, physical condition, zoning compliance, environmental matters, existing leases, and other operational issues affecting the property.

In some transactions, however, the buyer’s ability to obtain financing for the acquisition is treated as a separate and independent condition precedent to the buyer’s obligation to close. In those cases, the parties may negotiate an express financing contingency in the purchase and sale agreement.

This distinction can affect closing risk and the likelihood that an earnest money deposit ultimately becomes non-refundable.

Due Diligence Period vs. Financing Contingency

Absent an express financing contingency, most commercial real estate purchase agreements assume that the buyer’s diligence period is the time within which the buyer must both evaluate the property and secure the debt and equity required to fund the acquisition.

If the buyer’s deposit goes hard upon expiration of the diligence period, and the buyer is unable to obtain financing thereafter, the buyer may nonetheless be obligated to close or risk forfeiting the deposit.

An express financing contingency alters this framework by establishing a separate contractual condition precedent tied specifically to the buyer’s receipt of financing on defined terms. If the buyer is unable to obtain the financing described in the contingency by the agreed outside date, the buyer is generally entitled to terminate the agreement and recover the deposit, provided that the buyer has satisfied any diligence and pursuit obligations set forth in the agreement.

Key Drafting Considerations

A well-drafted financing contingency should address several threshold issues.

Defined Loan Terms

The contingency should clearly describe the financing that must be obtained in order for the condition to be satisfied. These terms may include:

• Minimum loan-to-value ratio;
• Maximum interest rate;
• Required amortization period; and
• Minimum loan amount;

Without this level of specificity, disputes may arise as to whether the buyer has in fact satisfied the contingency or whether alternative financing options were reasonably available.

Outside Date

The contingency should include a clear outside date by which the buyer must obtain a binding loan commitment. This date is often negotiated to occur after expiration of the general diligence period, particularly where third-party reports required by lenders—such as appraisals or environmental studies—may delay underwriting timelines.

In the current environment, where underwriting cycles have lengthened, this timing issue has become increasingly significant.

Diligent Pursuit Requirements

Sellers will typically insist that the buyer be required to apply for financing promptly and to diligently prosecute such applications. This may include:

• Submitting loan applications to multiple lenders;
• Retaining a mortgage broker;
• Delivering requested financial information; and
• Paying third-party report fees.

Failure to comply with these obligations may result in the financing contingency being deemed waived, even if the buyer ultimately fails to obtain financing.

Interaction with Deposit Structure

The presence or absence of a financing contingency is often closely tied to the structure of the buyer’s deposit.

From a risk allocation standpoint, the financing contingency effectively extends the period during which the buyer’s deposit remains refundable, subject to compliance with the contingency terms.

Final Thoughts

A financing contingency represents a negotiated allocation of closing risk between the buyer and seller in a commercial real estate acquisition. For buyers, it provides a measure of protection against deposit forfeiture in the event that financing cannot be obtained on acceptable terms. For sellers, it introduces an additional condition that may delay closing or permit termination under circumstances unrelated to the condition of the property itself.

As with most provisions in a commercial real estate purchase agreement, the effectiveness of a financing contingency depends on the precision with which it is drafted and the clarity of the obligations imposed on the buyer in pursuing the required financing.