Contingencies in NYC Real Estate Purchase Contracts

When pursuing the purchase of an apartment or home in NYC, you are certain to hear about contingencies from your broker and your real estate attorney.

Prevu recently sat down with the partners and associates from Katz & Matz – a premier NYC-based real estate law firm – to get their perspectives on the most common contingencies  you might encounter in residential real estate contracts.

Below, see the insights we learned from the team based on their years of experience advising New Yorkers.

 

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Board Approval & Right of First Refusal

Every co-op contract in NYC is contingent upon the Purchaser receiving Board Approval.  The most up-to-date co-op contract clearly states that the “sale is subject to the unconditional consent of the corporation.” 

This means that the Board must approve the Purchaser(s) without imposing any conditions.  The two most common conditions that Boards impose when approving a Purchaser are: 1) holding 1-2 years of maintenance in escrow until the Board is comfortable that Purchaser(s) can meet their financial obligations; or 2) having the Purchaser’s maintenance obligation guaranteed by a third party. 

These conditions are generally imposed when a Purchaser’s financials are at or near the lower end of what the Board likes to see.  If one of these, or any other condition is placed on a Purchaser’s approval, the Purchaser has the right to cancel the contract.  Further, if the Purchaser is outright denied by the Board, the contract is also deemed cancelled.  To successfully cancel the contract and receive back the contract deposit, it must be clear that the Purchaser applied to buy the apartment in good faith AND that he/she provided the Board with all documentation reasonably requested by the Board.

Most condo contracts are contingent upon the Board issuing their Waiver of Right of First Refusal.  We say most because there are some circumstances where this is not the case, such as: 1) purchasing directly from a Sponsor; or 2) where the Seller is retained “holder of unsold Units” status when they bought their Unit from a Sponsor. 

Unlike a Co-op, that can simply turn down a Purchaser for any reason, if a condo Board elects to not issue its waiver, the Condo itself must purchase the unit at the agreed-upon price and terms set forth in the contract of sale presented with the waiver application.  As you could imagine, this happens significantly less frequently than a co-op Board denial as many condos do not have the cash readily available to consummate actually buying the Unit in question.

Financing Contingencies

As to financing, there are three main options in all contracts: fully Contingent on the Purchaser securing a loan commitment letter (most Purchaser friendly); Non-Contingent on the Purchaser securing a loan commitment letter (meaning if they don’t secure a commitment letter the Purchaser must proceed all cash, if they can, or they lose their contract deposit); and All-Cash (most Seller friendly, as “cash is king”). 

As to a fully “Contingent” contract, a Purchaser is required to obtain a loan commitment Letter within a certain number of days after their attorney receives a countersigned contract from the Seller, or “the delivery date.”  Industry Standard to secure a loan commitment Letter is typically 30 days.  Please note that a loan commitment Letter is vastly different than a pre-approval.  While a pre-approval is a great thing to have when placing an offer on an apartment, it falls far short of giving the certainty that a loan commitment letter does.   A pre-approval only looks at a Purchaser and their financial standing, whereas a loan commitment letter requires that the bank approve the building and obtains an appraisal suitable for the loan amount contemplated in the contract. 

Regarding building approval, the lender will look at a number of factors in deciding whether or not to lend in a specific project, such as:  the Financial History of the Building; its Budget; its Insurance Policy; Owner Occupancy; and various other factors that may be specific to the bank the Purchaser applied to. The appraisal, on the other hand, looks at the unit’s “value” as determined by an uninterested third-party appraiser.  An appraisal is essential to ensure that the Purchase Price is sufficient to justify the Loan amount sought.  Some factors in an appraisal are: state of apartment; amenities; square footage; limited common elements specific to the unit in contract; comps in the building and the surrounding geographic location; etc. 

If the lender is unable to issue a loan commitment letter, in a fully Contingent contract, to the Purchaser within the time specified, the Purchaser, at their sole option, may 1) cancel the contract and receive their contract deposit back; 2) ask to extend the Contingency Period to allow the bank more time to issue the commitment letter; or 3) Waive the contingency and proceed at their own risk.  It should ne noted that failure to timely cancel the contract for failure to obtain a loan commitment letter shall be deemed waiver of any and all cancellation rights.  Please keep on top of all dates, so as to not risk this one pitfall.

More on the Appraisal

If a unit does not appraise at the purchase price listed in the contract, three things can occur:

  1. If the loan amount in the contingency is less than 80% of the purchase price, the bank may still issue a commitment letter and lend to the Purchaser, as long as the Loan amount is not greater than the 80% appraised value.  (Most Lenders will only lend up to 80% of a given purchase price).
  2. If the loan amount in the contingency is 80% of the purchase price, the lender will likely not issue a commitment letter and this will enable Purchaser to cancel the contract under the financing contingency.
  3. If the loan amount in the contingency is 80% of the purchase price, the Purchaser can request that the Seller reduce the purchase price to the appraised value so that the Contracted Loan Amount would be 80% of the appraised value/reduced contract price.  The Purchaser has bargaining power in this situation where the contract is contingent on an 80% Loan, since they would have the option to cancel the contract if the Seller does not agree to reduce the price.

Other Rare Contingencies – Inspection and Sale Contingencies

Sellers and Purchasers are free to negotiate really any type of contingency they want in a contract.  These contingencies can include inspection contingencies and/or sale contingencies.

An inspection contingency is typically seen when the parties are interested in getting into contract quickly.  Some Purchasers, especially in houses, townhouses and small condo / co-ops, want to have the home/unit/building inspected prior to going into contract.  If they do not have time to have the unit inspected by a licensed Inspector prior to going into contract, the parties can agree to have the unit inspected in a specific time frame. If the Inspection finds defects in the home/unit/building, the Purchaser can either cancel the contract or require Seller to remedy the defects or provide the Purchaser with an agreed-upon credit to remedy said defects. 

Generally, these types of contingencies first allow a Seller to decide if they want to make the required repairs.  If the Seller does not want to, then the Purchaser can cancel the contract.  This type of contingency is rare, since it gives a Purchaser a lot of power and an out of the contract.  It also could result in the Seller having to make substantial repairs to a Unit.  Further, this can lead to issues as to what is a material defect that would give rise to allow a Purchaser to cancel the contract or require a Seller to remedy.  More commonly, when inspections takes place prior to entering into contracts, Purchasers and Sellers can agree what needs to be remedied prior to closing and address it in the contract.  This is how most inspections are handled as it allows both parties to enter into the contract “eyes wide open.”

Another rare type of contingency is a Sale Contingency.  This would make the Purchaser’s obligations contingent upon the sale of another property they own.  Generally, this would require the property they are selling to be in contract prior to the execution of the contract for the nee property that they are looking to buy.  It is common, in these instances, that a timeframe to sell is placed in the contract whereby if the Purchaser’s other residence is not sold in x days, the Purchaser can cancel the contract or waives the contingency.  As Sellers do not want to permit Purchasers the ability to cancel a contract for a reason that has nothing to do with the unit itself and is completely out of their control, sales contingencies are rare.

 

Do you have questions about an upcoming real estate transaction in NYC? 

To connect with the team from Katz & Matz, click here to learn more about their real estate legal services.

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DISCLAIMER: This material was provided for informational purposes only, and is neither intended to provide, nor should be relied upon as tax, legal, or accounting advice. Prevu and its subsidiaries do not provide tax, legal, or accounting advice. You are encouraged to consult your personal tax, legal, or accounting professionals before considering any transaction as your individual situation may vary.

 

Categories: Buyer NYC