The contingencies clause is for surprises that come up after you have done all the due diligence you can. Some people like to put a financing contingency in their contracts because negotiating financing can be very lengthy with a commercial transaction. I usually have only a title contingency - if it turns out that the seller does not have clear title for some reason, then I can cancel. That might be because the seller has a spouse I did not know about, but must sign the deed for me to get 100% title to the property. If the success of the deal depends on something happening in the future, you might want to include that as a contingency.
An encumbrance is something that places a claim or burden on property. Mortgages are encumbrances that must be paid off at closing in order to deliver good title. Leases are also encumbrances. If a seller leases some or all of the property to someone else before closing, then you might be saddled for many years with a tenant you do not want, at below-market prices. You should require in your offer that the seller disclose to you all leases - including billboard, mineral, air rights, and premises - currently on the property or under negotiation.
Easements should also be disclosed - these are rights to do something on the property (right of way, parking) or to avoid doing something (scenic view easement.) Your encumbrance clause wants to provide that the seller will not enter into any agreements affecting the property after the date of your offer, unless they are disclosed to you and agreed upon by you in writing.
Because things happen. You buy insurance because you might suffer financially crippling surprises. You put a default clause in a contract for the same reason.
If the seller refuses to go through with closing, the buyer can often force that result through something called a specific performance lawsuit. But, the buyer has to spend legal fees. Not all states automatically allow the buyer to recover those fees, so the contract has to say the parties agree to it.
If the seller defaults but cannot deliver good title if he or she wanted, or if the buyer elects to demand specific performance, then the buyer should be reimbursed for his or her out-of-pocket expenses for due diligence and loan commitments. That seems reasonable. Many buyers want to collect damages for their lost profits on the deal, and so do not want to limit their agreement to the aforementioned matters.
Iit is virtually impossible for a small investor or a new investor to collect lost profits. The courts rule that any profits are just too speculative. Plus, the illusion of being able to collect this money often leads you down the primrose path of massive expenditures in legal fees, time, and emotional turmoil. I recommend you move on with your life and find some other investment.
If the buyer defaults, the seller usually keeps the earnest money but agrees not to sue the buyer for any other damages. Those could potentially be very large, especially if the seller later accepts a much lower offer. You might be liable for the difference in the two prices, plus interest. In one very unusual circumstance in California, a seller was able to force the buyer to go through with closing. If you are the buyer, agree to give up the earnest money and reimburse the seller for any out-of-pocket expenses associated with getting ready to move out, make repairs you requested, or do other such things.
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1. Investing In Commercial Real Estate
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