Real Estate 101: Why You Should Negotiate a Casualty Provision
January 18, 2017
A warehouse deal is under contract after months of negotiations. Shortly before the deal is scheduled to close, someone breaks into the warehouse and rips out $100,000 worth of copper wiring. Who bears the risk of that loss? Can the buyer just walk away at this point?
Unfortunately, the risks of a real estate deal are not limited to due diligence matters and the fear of petroleum bubbling out of the parking lot (which does happen). Real-life scenarios such as this copper theft can, and do, occur every day.
Neither the buyer nor seller wants to face this impending financial risk without some level of protection. Can either party be protected?
The answer is yes. One solution is to fully negotiate an often overlooked provision, the “casualty clause”, into the contract.
How does this work?
Clauses. Provisions. We know they can make your eyes glaze over. But each clause and provision is important, and every word means something.
When it comes to the casualty clause, it is understandable that both parties want to be protected. The buyer wants the seller to absorb the risk of the loss and the option to walk away if there is a loss. The seller is not interested in an open ended repair obligation nor a contract where the buyer can simply walk away if the loss is not substantial. A properly drafted casualty clause carefully defines a substantial loss and outlines what happens in the event a loss is not substantial. It also covers the payment of insurance deductibles (which can be substantial), the assignment of insurance proceeds, the conditions for a contract extension, what happens if an uninsured loss occurs, and when a buyer may elect to terminate the agreement. The casualty clause does not put the seller in the position where it has an unconditional obligation to fix something, and it gives the buyer an out if the property being purchased has materially changed.
Set expectations from the beginning.
Nobody wants to face the prospect of a casualty. In one case, a multi-unit condominium caught fire twice before the deal could close.
Working with an experienced real estate lawyer who thoroughly documents a transaction from the get-go, so that both parties are clear on expectations and goals, can go a long way towards helping you be sure your returns are realized, and minimize disputes and additional costs.
Remember, if you get it right on the front end, you can concentrate your efforts on producing income and save a lot of money and heartache later.
Looking for guidance on your next real estate deal? Reach out to Mark Miller at 410-986-0840 or firstname.lastname@example.org