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Seller Protections in CRE Term Sheets

Matt Pacinelli February 20 4 min read

The Market and Term Sheets 

Over the past two years, commercial real estate (CRE) markets have faced numerous challenges, including rising interest rates and the specter of a national recession. These conditions have made many investors cautious, preferring to wait on the sidelines for more definitive market signals. Nonetheless, a mix of new and seasoned investors have identified these conditions as a prime opportunity, recognizing the advantages of entering the market ahead of intensifying competition. 

In the current market, both buyers and sellers often find themselves navigating through unfamiliar situations. For instance, many sellers face the urge to finalize term sheets more quickly, potentially compromising on terms that don’t fully protect their interests. Our dedication at Stream is to steer our clients through strategic planning, especially during the term sheet phase—a pivotal step that can significantly influence the trajectory of a deal toward success or not. 

The Interview 

We rigorously craft term sheets, recognizing the crucial role they play within CRE transactions. In this article, we explore specific seller-friendly clauses prevalent in CRE term sheets. For insights on this topic, we sought the expertise of Sholom Yaffa, a partner at Grossberg, Yochelson, Fox & Beyda LLP, who specializes in commercial real estate transactions nationwide. Our frequent collaboration with Sholom, as well as with other skilled professionals, such as architects and engineers, and other attorneys with different specialties, ensures our clients are well-prepared to navigate the intricacies of any deal. 

Matt Pacinelli: Can you explain why seemingly casual communication between buyers and sellers can unexpectedly lead to legally binding agreements? 

Sholom Yaffa: Certainly, Matt. The issue is that informal exchanges can unexpectedly become legally enforceable. This is due to the ‘statute of frauds,’ a legal principle requiring that certain agreements, including those related to the sale of real estate, must be in writing to be binding. Importantly, the requirement for a written agreement doesn’t mean it has to be a formal contract. Even a simple email, a series of written communications, or a preliminary term sheet could be enough to create a binding commitment to sell or buy property. While it’s relatively rare, these unintended commitments can and do happen, highlighting the need for sellers to navigate negotiations with potential buyers with caution. 

Charlie Smiroldo: I see you’re emphasizing the consequences for sellers over buyers regarding binding commitments. This makes sense, as buyers often have the option to exit a deal, usually risking only the loss of any hard deposit already made. 

Sholom Yaffa: Precisely, the distinction in legal exposure between buyers and sellers is stark. Buyers frequently operate through shell entities with little to no assets. Conversely, sellers own real estate and, therefore, have greater risk exposure. Pro-buyer clauses in term sheets are usually there to establish a consensus on the business terms before the buyer is prepared to invest significant time and money into advancing the transaction. 

If a dispute between a potential buyer and the seller escalates to litigation, the process can become drawn out, sometimes lasting years. During such disputes, if the property is entangled in litigation, it becomes nearly impossible for the seller to engage with other potential buyers or to refinance. This effectively puts the property in a state of limbo. This predicament highlights the importance of including legal protections for sellers in term sheets. 

Matt Pacinelli: Given that lawsuits over deals can hinge on informal written communications, what provisions do you include in term sheets to protect sellers while also being fair to buyers? 

Sholom Yaffa: First, the term sheet should explicitly state that it is non-binding. Without that declaration, the assumption is that both parties are committed to the outlined deal. Certain terms can be carved out from non-binding status, such as exclusivity and confidentiality clauses.  

Second, state that no binding agreement exists between the buyer and seller until a formal contract is executed, which eliminates any misunderstandings based on prior communications.  

Third, the term sheet should provide that any claim is “personal” against the seller and not against its “real property” and that the buyer does not have the right to record a lis pendens—a notice filed against the property in public records indicating a pending lawsuit, which would deter other potential buyers.  

Fourth, stipulate that the prevailing party in a dispute is entitled to have their legal fees covered by the losing party. This serves as a deterrent against unfounded legal actions while acknowledging that whatever protective language you include may mitigate risk but is certainly not always effective!  

Charlie Smiroldo: Could you elaborate on your third point about claims being personal to the seller rather than the seller’s real property? It’s a clause I don’t frequently see in term sheets. 

Sholom Yaffa: I began incorporating this provision following an experience that highlighted the need for enhanced seller protection while still ensuring fairness to buyers. A term sheet is not a commitment to purchase or sell. Until a formal contract is signed, there is no meeting of the minds, so the buyer shouldn’t have any rights over the property. This provision is designed to clarify that both the seller and buyer aim to maintain a clear title to the property even if litigation ensues. The buyer may seek damages through a legal claim but cannot compel the seller to proceed with the sale of the property.  

*The information provided within this article does not, and is not intended to, constitute legal advice; all information, content, and materials are for general informational purposes only.  


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