Back-Up Offers: Negotiation Leverage or Transaction Pitfall?

Updated on September 27, 2023

If you are selling commercial real estate, one of the most important issues you need to consider is whether to accept a backup offer.  For good reason, most standard commercial purchase contracts allow a seller to solicit and accept competing backup offers up through the close of escrow.   As explained below, a seller can obtain substantial benefits from accepting backup offers, but these backup offers also come with a certain amount of risk.

By accepting a legitimate backup offer, a seller gains an invaluable bargaining tool with the buyer currently under contract.  If the current buyer is moving too slow with their due diligence, a seller can threaten to cancel the transaction and move forward with a backup offer.  Often times, this threat alone is enough to force the buyer to speed up their due diligence.  If the current buyer is making unreasonable demands for repairs/credits, a seller can threaten to cancel the transaction and move forward with a back up offer.  Again, this threat will often force the current buyer to reduce their demands, or withdraw them entirely. These two scenarios alone usually justify the time and expense of considering, and accepting, backup offers.

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However, accepting and moving forward with backup offers brings certain risks.  If the seller moves forward with a backup offer, the buyer in the cancelled transaction may pursue litigation to obtain the property.  Alternatively, the buyer on the backup offer may consider the likelihood the buyer in the cancelled transaction will pursue litigation to be a material fact that needs to be disclosed.  In this situation, it is essential that the purchase contracts be drafted so that there is no ambiguity about when and how the seller can cancel a transaction and move forward with a back offer.  Further, the disclosures to the buyer on the back up offer must carefully disclose the status of the cancelled buyer’s transaction.