The buyer of commercial real estate will usually have a general idea of what they are willing to pay when the owner of the property wants to sell. The idea reflects limited investigation and analysis because more investigation and analysis costs more than the potential buyer is willing to spend without knowing that the property is under contract.
In a seller-friendly market, the parties usually address the buyer's concern by signing a contract of sale but also giving the buyer a due diligence period in which to further investigate the property. The buyer can carefully review the leases, check out any physical issues, look for environmental issues, and satisfy itself that its plans for the property make financial sense. The due diligence period gives the buyer time to find the money needed to purchase the property.
The seller will usually get a phone call from the broker a few days before the due diligence period ends. The broker will let the buyer know that they need an extension of the due diligence period to check out issues related to the environment. The broker will announce that the buyer's due diligence investigations have revealed that the deal doesn't make sense without a price reduction.
The seller is faced with a dilemma. Prospective buyers who were in the picture earlier in the process have moved on to other things. They have probably lost interest. The property may be seen as damaged goods by the seller and its broker. If the seller pulls the property off the market, it could take a long time for the property to be marketed again. Buyers are usually accommodated by the sellers.
It's simple to allow more time. What needs to happen in that time may be tied down by a seller. If the buyer needs more time to investigate a pile of unidentified materials in the back yard of the property, then the due diligence period extension relates only to that investigation. The buyer has to close if the cost to solve the problem falls below an agreed ceiling.
The seller is more traumatised by a buyer requesting a price adjustment. The seller might be able to get some benefit in exchange for the price adjustment. The seller could try to speed up the closing, or the buyer could increase the deposit. The seller might demand a right to future payments if the property does well. Buyers won't agree to such measures If a buyer agrees to such measures, they will be hard to apply and enforce.
The seller could protect itself from some of the risks by charging the buyer a fee to take the property off the market. The buyer would have control of the property while it was being investigated. If the buyer decided against proceeding, the seller would be compensated. Only very seller-friendly markets are where sellers can obtain option fees.
A contract could give the buyer a due diligence period, but only if the buyer identifies genuine problems with the property that exceed a certain threshold. Buyers usually count on having total optionality as the result of a due diligence period, so this approach would scare them.
The buyer will either go ahead or go away if the seller pretends that the due diligence period is over. The contract could potentially be extended. The contract might say that the buyer needs to pay an extension fee if they want more time. The buyer would prefer to just increase the deposit and have it applied against the purchase price in the event of an emergency. The buyer might still request a free extension, even if the contract requires an extension fee, because it varies from what the parties agreed to.
If the seller has other buyers waiting in the wings, that can make it harder for buyers to take advantage of due diligence periods. The seller may want to make it clear that it has the right to negotiate with other potential buyers. Given that a buyer with a generous due diligence period has no commitment to the transaction, it is reasonable for the seller to not agree to exclusiveness with any buyer.
A seller should try to time its sale to coincide with a seller friendly market. Commercial real estate markets are not very seller friendly. In the short term, that situation is likely to get worse. Not all sellers have a long-term view, so they need to either wait for a better day somewhere down the road, or figure out some other way to mitigate the effect of generous due diligence periods in contracts.
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