Prior to closing: Overview, definition, and example
What is "prior to closing"?
"Prior to closing" refers to the period leading up to the finalization of a transaction, such as the closing of a sale, a merger, a real estate deal, or any other business agreement. It encompasses the time between the agreement or contract signing and the actual closing event, where the transaction is officially completed. During this period, both parties involved in the transaction typically complete any outstanding requirements, such as due diligence, securing financing, or obtaining necessary approvals, to ensure that the deal can proceed smoothly.
In real estate transactions, for example, "prior to closing" involves steps like inspections, negotiations, and securing financing before the ownership of the property officially changes hands.
Why is "prior to closing" important?
The "prior to closing" period is crucial because it allows both parties to finalize the details of the transaction and ensure that all necessary conditions are met before the deal is finalized. This time allows for any last-minute negotiations, regulatory approvals, document preparation, and issue resolution. It is an important phase that helps prevent complications or surprises that could delay or derail the transaction.
For buyers, this period is vital for securing financing, inspecting the property (in the case of real estate), or ensuring that all contingencies in the agreement are satisfied. For sellers, it provides the time to prepare the necessary documentation and ensure that the transaction proceeds according to the terms agreed upon.
Understanding "prior to closing" through an example
Imagine you're buying a house. After signing the purchase agreement, you enter the "prior to closing" phase. During this time, you may need to secure a mortgage, conduct a home inspection, and obtain homeowners’ insurance. The seller, on the other hand, may be required to provide necessary documents, such as proof of ownership and tax records. Once all the necessary steps are completed and both parties are satisfied, the transaction will "close," meaning the property ownership will transfer to you.
In another example, a company is in the process of acquiring another company. "Prior to closing," both parties will likely conduct due diligence to review financial statements, contracts, and other relevant documents. They may also need to secure regulatory approvals or finalize financing arrangements. Once all conditions are met, the deal will close, and ownership of the target company will be transferred.
Example of "prior to closing" clause
Here’s an example of what a "prior to closing" clause might look like in a contract or agreement:
“Prior to closing, the Buyer shall have the right to conduct due diligence on the Property, including, but not limited to, inspections, title searches, and financial audits. The Seller agrees to provide all necessary documentation required for the Buyer to complete these activities. The Buyer must notify the Seller of any issues arising from these inspections before [insert date], after which the transaction will proceed to closing unless otherwise agreed by both parties.”
Conclusion
"Prior to closing" is an important period in any business transaction or deal, allowing both parties to finalize outstanding tasks, complete due diligence, and ensure that all conditions of the agreement are met before the deal is finalized. During this time, both buyers and sellers (or parties involved) work to resolve any remaining issues or finalize paperwork, setting the stage for the official closing of the transaction. Ensuring everything is in order "prior to closing" helps to prevent delays, misunderstandings, or complications that could impact the finalization of the deal.
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.