Whether you are selling a $15 million hotel in Manhattan or leasing space in a Newark commercial office building, contract negotiations can be either long and tedious or straightforward and efficient. The key is knowing how to identify red flags and keep your eye on the fine print. During the negotiating process, giving the appearance that you are ready to walk away from the deal at any time strengthens your stance and provides more leverage when you need it. With adequate preparation, no one should end up like the unfortunate couple in this New York Times piece. Be an informed buyer/seller/renter by recognizing the top five roadblocks in contract negotiations and following tips to successfully navigate them.
ROADBLOCK: By far, the number one reason a commercial real estate contract falls apart is because of price. The parties simply cannot agree on, or cannot afford, the contract cost terms. Even if the market price of a particular property is established and accepted unanimously, there may be additional fees such as security deposits, interest payments, “rent rolls,” or attorney fees in the event of litigation which remain in dispute throughout the negotiation process.
NAVIGATION TIP: To save both time and money, disclose all known financial considerations as early in the business transaction as possible. For sales and purchases, it is crucial to enlist the services of a reputable appraiser, architect, property inspector, and engineer. Even if the other party has already presented the findings of these professionals, it is crucial to get your own expert opinions. Unfortunately, professional opinions can be bought and the discrepancy between their appraiser’s valuation and yours can save you tens of thousands of dollars. As a buyer or renter, ask up front for a checklist of all fees included in the deal and carefully evaluate whether the price terms are acceptable or negotiable.
ROADBLOCK: Some contracts ask signees to waive everything under the sun and people sign anyway without realizing what they’ve forfeited. For example, a private lending institution may include a provision that calls for borrowers to waive their Constitutional right to a trial by jury. Private commercial hard money lenders may be worried that a jury of their peers would rather punish them for their exorbitant interest rates than fairly adjudicate the case at hand. Another common waiver is the right to security deposit funds if certain conditions are not met.
NAVIGATION TIP: Read carefully any discussion of waivers in your contract, even if the word “waiver” is not expressly mentioned. Look for words such as “forego,” “relinquish,” and “surrender” and firmly stand up for your rights. Unless it’s a deal breaker, you do not need to either accept or reject a waiver provision unilaterally, but you can also try to negotiate the parameters of each disparate clause to suit your particular needs and proceed with the transaction.
ROADBLOCK: If you are actively searching for a property to purchase, whether as a developer or for your own personal residence, bad timing can kill the deal, especially in the case of 1031 exchanges. Sellers are not interested in waiting around and once another serious offer is made, they will move quickly to complete the sale.
NAVIGATION TIP: To ensure timing doesn’t interfere with your purchasing opportunities, do as much preparation as possible before your dream property is listed. Every real estate buyer should try to answer the following questions in the affirmative before making an offer:
- Do you have adequate funding resources for the purchase price and additional costs?
- Have you approached a bank or lender for financial assistance, if necessary?
- Do you know the approximate market value of properties in the desired location
- Do you know a reliable appraiser?
- Have you notified your attorney of your intended purchase plans?
4. Tunnel Vision
ROADBLOCK: In contract negotiations, as in life, tunnel vision implies a sense of close mindedness and inflexibility. While some priorities are deal breakers if not satisfied in real estate contracts, being unnecessarily rigid rarely helps people achieve their end goals.
NAVIGATION TIP: Before you approach the negotiating table, create three lists and keep these lists in mind while attempting to reach an agreement. The lists include:
- Needs: Terms on which you simply cannot bend. This list often includes an absolute minimum or maximum price or location of the property.
- Wants: Terms which you strongly would like to see in the contract, but there is some flexibility. This list includes provisions involving closing costs and dispute resolution methods. This should be your longest of the three lists.
- Freebies: Terms which clearly show you are nullifying your wants for the sake of the other party. For example, a provision prohibiting pets, loud noise, and children from a rental property would be a concession on the part of the renter.
5. A Burnt Bridge
ROADBLOCK: When contract negotiations fail, do not burn the bridge. In other words, just because you were unable to successfully negotiate a contract on this property with these people in this instance does not preclude you from successfully negotiating one in the future with the same people. Even if the same property is involved, sometimes parties simply need a break from one another in order to reconcile.
NAVIGATION TIP: Where you and your attorney see that the negotiations are not getting anywhere and there is a dead end, keep the relationship with the other party professional and respectful. You never know if, down the line, the other party will reconsider, realize that your terms were reasonable, and wish to pick up where you left off. Next time, you may even have the upper hand at the negotiating table.
Seasoned contract negotiators know industry standards and what “reasonable” looks like when dealing with commercial and residential agreements. Preparation goes a long way in achieving successful negotiations. With a flexible attitude, stern advocacy, and the right approach, you can coast through your contract negotiations to enjoy the results of your upcoming sale, purchase, or leasing arrangement.