Thursday, March 3, 2016

4 Things You Need to Know About Holdbacks At Closing

So you are preparing to close on an investment property, and an unforeseen problem arises just prior to the closing date. The problem can be a physical building issue, title related, or potentially connected to a tenant matter.

Whatever the problem - often times the parties, and more specifically the lawyers closing the deal - will likely discuss the prospect of a ‘HOLDBACK’ at closing.

What? – It’s the option of holding back a specified amount of the purchase amount, in order to ensure the Seller completes the work or remedies the problem which has arisen. The holdback amount is then agreed to by both parties and is released and ultimately paid when the problem is corrected.

Why? – It comes into play, as a means to correct a matter that in most cases was unforeseen at the time a deal has gone firm, and after all conditions were waived. If the parties agree (not always the case), it allows the deal to still close and keeps the Seller ‘incentivized’ to correct the problem as quickly as possible. After all, they will want to recover the holdback amount in order to realize the full purchase price.

Benefits? – Holdbacks primarily benefit the Buyer, as it not only addresses the matter prior to closing, but it assumes the amount withheld would be able to correct the problem if the Seller chose not to. But again from the Seller’s standpoint, it does benefit them as it allows the deal to still close subject to the holdback – which often is a small percentage of the total purchase price.

Potential Problems – Firstly holdbacks are not a given or automatic, particularly if they were not included in the Agreement of Purchase and Sale. As such, the potential for resistance on the Seller’s part can arise and legally it is best to tread lightly (a.k.a. consult your lawyer). Holdbacks are a compromise after the fact with both parties in an agreement, otherwise you may still be contractually bound to close. Most often it depends on the scope of the problem and the holdback amount proposed.

As a final point, holdbacks should be ‘time-limited’, so the parties understand within what period of time the matter will be resolved. – 30/60/90 days. As this becomes a post-closing matter, best practice is always the ‘sooner-the-better’.

No HOLDBACKS here…… just a click/call away from discussing our latest investment opportunities here in Windsor-Essex.

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

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