In many purchase agreements, at the expiration of the due diligence period, Buyer is required to make a decision.  A buyer decides whether it will: (1) disapprove of a contingency (and terminate the purchase transaction); or (2) waive its contingencies, causing its deposit to become non-refundable, and proceed to purchase the property.

Question: Under the AIR CRE purchase agreement, if a Buyer disapproves of a Buyer Contingency, does the agreement and escrow terminate?

Short Answer: Generally, no.  The disapproval of a Buyer Contingency triggers a process where (a) Seller elects whether to cure the disapproval, and (b) if Seller does not elect to cure, Buyer may terminate the Agreement. However, there are two exceptions to this back-and-forth process.  If Buyer disapproves of (1) a Hazardous Substance Condition, or (2) the Financing Contingency, then the Agreement automatically terminates.

Buyer’s Disapproval Triggers Seller’s Right To Cure (Most of the Time): If Buyer disapproves of a Buyer Contingency (such as disapproval of the physical condition or title), the AIR CRE purchase agreement does not automatically terminate.  Under Paragraph 9.3, the following process is triggered:

• Seller’s Response: Seller has 10 days to elect to cure the Disapproved Item before the Expected Closing Date. If Seller is silent for 10 days, it is deemed to have elected not to cure.
• Buyer’s Reply:
  • If Seller elects to cure the Disapproved Item, no reply by Buyer is required.
  • If Seller elects not to cure (either affirmatively or by silence), then Buyer may proceed to purchase the Property (subject to the Disapproved Item), or may terminate the Agreement. Note: If Buyer does not reply within 10 days, Buyer is deemed to have terminated the Agreement.

Automatic Termination For Disapproval of Hazardous Substance Condition or Financing Contingency: If Buyer disapproves of a Buyer Contingency, Seller generally has a right to cure (as described above).  However, there are two situations where Seller does not have a right to cure.  Seller has no right to cure: (1) the remediation of a Hazardous Substance Condition; or (2) the Financing Contingency.  Accordingly, if Buyer disapproves of either of these two items, the Agreement and escrow automatically terminates.

Excerpt from AIR CRE Purchase Agreement

9.3 If any of Buyer’s Contingencies or any other matter subject to Buyer’s approval is disapproved as provided for herein in a timely manner (“Disapproved Item“), Seller shall have the right within 10 days following the receipt of notice of Buyer’s disapproval to elect to cure such Disapproved Item prior to the Expected Closing Date (“Seller’s Election“). Seller’s failure to give to Buyer within such period, written notice of Seller’s commitment to cure such Disapproved Item on or before the Expected Closing Date shall be conclusively presumed to be Seller’s Election not to cure such Disapproved Item. If Seller elects, either by written notice or failure to give written notice, not to cure a Disapproved Item, Buyer shall have the right, within 10 days after Seller’s Election to either accept title to the Property subject to such Disapproved Item, or to terminate this Agreement. Buyer’s failure to notify Seller in writing of Buyer’s election to accept title to the Property subject to the Disapproved Item without deduction or offset shall constitute Buyer’s election to terminate this Agreement. The above time periods only apply once for each Disapproved Item. Unless expressly provided otherwise herein, Seller’s right to cure shall not apply to the remediation of Hazardous Substance Conditions or to the Financing Contingency. Unless the Parties mutually instruct otherwise, if the time periods for the satisfaction of contingencies or for Seller’s and Buyer’s elections would expire on a date after the Expected Closing Date, the Expected Closing Date shall be deemed extended for 3 business days following the expiration of: (a) the applicable contingency period(s), (b) the period within which the Seller may elect to cure the Disapproved Item, or (c) if Seller elects not to cure, the period within which Buyer may elect to proceed with this transaction, whichever is later.