After an AIR CRE purchase agreement is signed, Buyer commences its due diligence.  If Buyer is satisfied with its inspections, Buyer may waive Buyer’s Contingencies, and proceed with the transaction.  Once Buyer’s Contingencies have been waived, Buyer’s Deposit is often described as “non-refundable.”

Question: After waiver of Buyer’s Contingencies, is Buyer’s Deposit ever refundable?

Short Answer: Yes, it is refundable in three circumstances:

1. Seller commits a breach.
2. Damage or destruction to the Property of more than $10,000.
3. A “Material Change” occurs.

Buyer’s Deposit is Refundable in Three Situations: Paragraph 4.5 of the AIR CRE purchase agreement provides that the Deposit is refundable to Buyer “in the event of a Seller breach, or in the event that Escrow is terminated pursuant to the provisions of Paragraph 9.1(n) (Destruction, Damage or Loss) or 9.1(o) (Material Change).” (See Paragraph 4.5 excerpt below.)

Buyer’s Deposit is Refundable if Damage or Destruction Exceeds $10,000: Even if Buyer waives Buyer’s Contingencies, if there is damage or destruction to the Property exceeding $10,000, Buyer has a right to terminate the Agreement within 10 days after receipt of written notice.  If Buyer timely exercises its termination right, Buyer is entitled to return of its Deposit pursuant to Paragraph 4.5. (See Paragraph 9.1(n) excerpt below.)

Note: Many Sellers increase the $10,000 threshold to avoid a situation where a relatively minor event gives rise to a termination right for Buyer.  The threshold is sometimes changed to a percentage of the Purchase Price, such as 2%.

Buyer’s Deposit is Refundable if a “Material Change” Occurs: If a Material Change occurs, Buyer may disapprove of the Material Change within 10 days. (See Paragraph 9.1(o) below.)  A “’Material Change’ means a substantial adverse change in the use, occupancy, tenants, title, or condition of the Property that occurs after the date of this offer and prior to the Closing.”

The definition of Material Change is broad.  A “substantial adverse change” to any of the following five aspects of the Property gives Buyer a right to disapprove: (1) use; (2) occupancy; (3) tenants; (4) title; or (5) condition.

Note: Many Sellers narrow the definition of Material Change.  For example, it is sometimes limited to a substantial adverse change that occurs “after waiver of Buyer’s Contingencies,” rather than “after the date of this offer.”  Sellers sometimes attempt to eliminate one or more of the five aspects of the Property that constitute a Material Change.

Excerpt from AIR CRE Purchase Agreement – Paragraph 4.5

4.5      Upon waiver of all of Buyer’s contingencies the Deposit shall become non-refundable but applicable to the Purchase Price except in the event of a Seller breach, or in the event that the Escrow is terminated pursuant to the provisions of Paragraph 9.1(n) (Destruction, Damage or Loss) or 9.1(o) (Material Change).

Excerpt from AIR CRE Purchase Agreement – Paragraph 9.1(n)

9.       Contingencies to Closing.

9.1 …

(n)       Destruction, Damage or Loss. Subsequent to the Date of Agreement and prior to Closing there shall not have occurred a destruction of, or damage or loss to, the Property or any portion thereof, from any cause whatsoever, which would cost more than $10,000.00 to repair or cure. If the cost of repair or cure is $10,000.00 or less, Seller shall repair or cure the loss prior to the Closing. Buyer shall have the option, within 10 days after receipt of written notice of a loss costing more than $10,000.00 to repair or cure, to either terminate this Agreement or to purchase the Property notwithstanding such loss, but without deduction or offset against the Purchase Price. If the cost to repair or cure is more than $10,000.00, and Buyer does not elect to terminate this Agreement, Buyer shall be entitled to any insurance proceeds applicable to such loss. Unless otherwise notified in writing, Escrow Holder shall assume no such destruction, damage or loss has occurred prior to Closing.

Excerpt from AIR CRE Purchase Agreement – Paragraph 9.1(o)

9.      Contingencies to Closing.

9.1 …

(o)       Material Change. Buyer shall have 10 days following receipt of written notice of a Material Change within which to satisfy itself with regard to such change. “Material Change” shall mean a substantial adverse change in the use, occupancy, tenants, title, or condition of the Property that occurs after the date of this offer and prior to the Closing. Unless otherwise notified in writing, Escrow Holder shall assume that no Material Change has occurred prior to the Closing.