Can a Buyer or Seller Back Out of a Commercial Real Estate Contract in Michigan?

Commercial real estate transactions can involve months of negotiations, due diligence, financing, inspections, and planning. When a buyer or seller decides not to move forward shortly before closing, the other party may be left with significant financial losses and an important question: Can they legally back out of the deal?

The answer depends heavily on the purchase agreement and the circumstances surrounding the transaction. Commercial real estate contracts often contain specific contingencies, deadlines, termination rights, and remedies that determine what happens when a transaction does not close as planned.

Sadecki & Associates represents businesses, property owners, buyers, sellers, and developers in commercial real estate matters throughout Michigan. When a transaction begins to fall apart, understanding the parties’ contractual rights is critically important.

When Can a Buyer Back Out of a Commercial Real Estate Purchase?

A buyer’s ability to terminate a commercial real estate transaction generally depends on the terms of the purchase agreement.

Commercial purchase agreements may include contingencies related to:

• Financing

• Property inspections

• Environmental due diligence

• Title review

• Zoning and permitted use

• Survey results

• Required governmental or third-party approvals

If a contingency is not satisfied within the time and manner required by the agreement, the buyer may have a contractual right to terminate.

However, simply changing plans or deciding that a property is no longer desirable does not necessarily give a buyer the right to walk away without consequences.

Can a Seller Back Out Before Closing?

A seller may also have limited rights to terminate a transaction depending on the contract.

Once a binding purchase agreement has been signed, a seller generally cannot assume that receiving a better offer or changing their mind allows them to cancel the existing transaction.

The agreement may need to be reviewed to determine whether a termination right exists and what remedies may be available to the buyer if the seller refuses to close.

What Happens to the Deposit or Earnest Money?

Disputes over earnest money are common when commercial real estate transactions fail to close.

Whether the deposit is returned to the buyer or retained by the seller often depends on why the transaction was terminated, the circumstances, and what the purchase agreement provides.

For example, a buyer that properly terminates under a contractual contingency may be entitled to the return of its deposit. A buyer that defaults after applicable contingencies have expired may face a different result.

The language governing deposits, default, and termination should be reviewed carefully before either party assumes who is entitled to the funds.

What If One Party Breaches the Purchase Agreement?

When a buyer or seller refuses to complete a transaction without a contractual basis for doing so, the other party may have a potential breach of contract claim.

Available remedies depend on the agreement and circumstances. They may involve monetary damages, retention or return of a deposit, or other contractual remedies.

In certain commercial real estate disputes, a party may also seek specific performance, which generally involves asking a court to require completion of the transaction rather than awarding monetary damages alone.

Whether a particular remedy is available requires review of the contract and facts involved.

Due Diligence Deadlines Can Become Critical

Commercial transactions often include a defined due diligence period during which the buyer can investigate the property.

During this period, buyers may review environmental conditions, leases, financial information, zoning, physical conditions, title matters, and other issues affecting the property.

The timing requirements in the agreement matter. Missing a deadline for raising an objection or exercising a termination right can significantly affect the parties’ options later.

This is one reason commercial purchase agreements should be reviewed carefully before deadlines pass or a dispute develops.

Frequently Asked Questions

1. Can a buyer lose its deposit if it backs out of a commercial real estate deal?

Potentially. The result depends on the purchase agreement, applicable contingencies, and the reason the buyer terminated the transaction.

2. Can a seller accept another offer after signing a purchase agreement?

A seller’s rights depend on the existing agreement. Accepting or pursuing another transaction does not necessarily eliminate obligations owed to the original buyer.

3. What is specific performance in a commercial real estate dispute?

Specific performance is a potential legal remedy that may require a party to complete a transaction according to the terms of the contract. Whether it is available depends on the circumstances.

4. Should a commercial purchase agreement be reviewed before terminating the deal?

Because termination provisions, deadlines, deposits, and remedies can vary significantly, reviewing the agreement before taking action can help clarify the parties’ rights and potential exposure.

Commercial Real Estate Representation Throughout Michigan

A failed commercial real estate transaction can affect far more than the property itself. Buyers and sellers may have invested substantial time and money into financing, inspections, environmental reviews, professional services, and plans for the property.

Sadecki & Associates represents businesses, property owners, investors, and developers in commercial real estate transactions and disputes throughout Michigan.

If a commercial real estate purchase is at risk of falling through or a dispute has developed over a purchase agreement, contact Sadecki & Associates to discuss the matter with an attorney.

Disclaimer: This blog is provided for general informational purposes only and does not constitute legal advice. Every legal matter is different, and the information provided may not apply to your specific circumstances. For legal advice regarding your individual situation, contact Sadecki & Associates to discuss your matter with an attorney.