What is a Feasibility Contingency?
Most real estate purchase and sale agreements involve the acquisition of residential real estate, often housing (apartment style units, townhomes, single family homes, etc.), for the purpose of serving as a primary residence for the buyer, or as an investment opportunity in the property’s current form. In these circumstances, the buyers basically know what they are getting into in terms of the use of the property – they, or someone else, will inevitably live at the property. These buyers may need an inspection contingency to help them determine if the property has issues they need to address. My colleague, Aaron Dunn, posted an article about this topic here. They also may need other contingencies, such as a financing contingency, appraisal contingency, or title contingency.
However, this buyer pool typically does not need to worry about the subject of this blog post: the feasibility contingency.
A feasibility contingency provides a buyer with a period of time (the “Feasibility Period”) where the buyer can assess the property to confirm its fitness for purchase. For example, potential purchasers (often developers) may seek vacant land or so-called “tear down” properties for purposes of building new housing, housing communities, or commercial structures. They will often wish to conduct a feasibility study to determine whether they can build in their desired fashion, including reviewing zoning codes, boundary issues, environmental concerns, and more. Similarly, a purchaser may want to simply buy commercial property to run a particular type of business and will need to ensure that the property is suitable for that business or the purchaser may instead buy commercial property to continue renting it out to current and (eventually) future tenants.
During the Feasibility Period, a buyer may engage in a variety of activities to help determine the desirability of the prospective purchase, including but not limited to:
- Title Review: Review of applicable title documents, including but not limited to easements, covenants, and shared maintenance agreements.
- Regulatory Review: Assessment of applicable codes, ordinances, and zoning laws to determine compliance for potential buyers who wish to retain the developments, and to determine feasibility for purchasers who wish to engage in redevelopment.
- Appraisal / Financial Review: Review of relevant appraisals, financial statements, rent rolls, and any other relevant financial documentation. Purchasers often obtain appraisals in advance of making an offer, whereas the other financial information becomes more relevant for buyers who wish to operate similar businesses or wish to retain current tenants. In any case, the Feasibility Period will often include some sort of financial review to determine the appropriateness of the investment.
- Lease Review: Legal analysis of current leases serves a critical purpose when purchasing tenant-occupied real estate. This allows buyers to know what obligations they will assume.
- Property Inspection / Contractor Inspection: A professional inspector can reveal areas requiring maintenance and repair, while other contractors can assist with not only providing estimates to put a dollar figure to those revealed repairs, but can also give other assessments pertinent to redevelopment, such as water, septic, and electrical access. This review can affect the desirability of the purchase.
- Surveying: A professional surveyor can determine the exact record boundaries of the property, a fact that may hold special significance if a purchaser intends to redevelop.
- Environmental Assessments: An environmental consultant can ensure there are no hazardous substances at the property and can point out other areas of concern.
The list above is not exhaustive. It also demonstrates that work conducted during a Feasibility Period will often involve hiring a variety of professionals, such as property inspectors, environmental consultants, architects, and lawyers. While inspection contingencies and financing contingencies are commonplace and often of vital importance, a feasibility contingency can serve an equally important function in the right situation. Although the context for their utility may be relatively limited, in the right circumstances, the feasibility contingency can be essential.
Consulting with a lawyer can assist buyers and sellers to navigate through the feasibility process. If you are a prospective property purchaser, or a seller looking to sell real property, and you need assistance with any legal issues, please do not hesitate to contact the lawyers at Beresford Booth. We would be happy to assist you. Please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.