Failure to close: Overview, definition, and example
What is failure to close?
Failure to close refers to the inability of one or both parties involved in a transaction, such as a real estate deal, business acquisition, or loan agreement, to complete the final steps of the transaction by the agreed-upon closing date. "Closing" is the final phase in a deal where all necessary documents are signed, payments are made, and ownership or control is transferred. A failure to close can occur due to various reasons, such as failure to meet financing requirements, failure to satisfy conditions precedent, or unresolved issues that prevent the transaction from being finalized.
For example, in a real estate transaction, the failure to close could mean that the buyer does not secure financing in time or that the seller fails to provide the required documentation.
Why is failure to close important?
Failure to close is important because it represents a breakdown in the agreement between the parties, which can lead to significant legal and financial consequences. The failure to close often results in the forfeiture of deposits, penalties, or even lawsuits for breach of contract. For buyers, failure to close can lead to a loss of the property or asset they intended to purchase, while for sellers, it may result in a delay in receiving the agreed-upon payment or funds.
In many contracts, provisions related to failure to close are included to outline what happens if one or both parties fail to fulfill their obligations. These clauses help protect both sides and provide a clear path forward if the closing does not occur as planned.
Understanding failure to close through an example
Imagine a business owner who has agreed to sell their company to a buyer by a specific date. However, the buyer fails to secure the necessary financing on time, and the transaction cannot be completed. As a result, the "failure to close" clause in the agreement kicks in, and the seller may keep the buyer's deposit or seek other remedies outlined in the contract.
In another example, a homebuyer signs a purchase agreement to buy a house and the closing is set for a particular date. The buyer completes most of the steps, but fails to complete a required inspection. Since the closing cannot proceed without the inspection being completed, the failure to close occurs, and the seller may seek to cancel the agreement or keep the buyer’s earnest money deposit as a penalty.
An example of a failure to close clause
Here’s how a failure to close clause might appear in a contract:
"In the event that the Buyer fails to close the transaction by the Closing Date, the Buyer shall forfeit the Earnest Money Deposit as liquidated damages, and the Seller may either cancel this Agreement or pursue other legal remedies available. If the Seller fails to close the transaction by the Closing Date, the Buyer shall have the right to terminate the Agreement and recover the Earnest Money Deposit."
Conclusion
Failure to close is a significant issue in any transaction, as it can disrupt plans, lead to financial losses, and result in legal disputes. Understanding the conditions that could lead to a failure to close and the remedies available to both parties is essential for protecting the interests of everyone involved. Whether in real estate deals, business acquisitions, or financing arrangements, failure to close can have serious consequences, and having clear terms and clauses in place helps minimize risk and resolve issues if they arise.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.