Termination prior to closing: Overview, definition, and example
What is termination prior to closing?
Termination prior to closing refers to the legal right or ability of one or both parties involved in a transaction to cancel or terminate the agreement before the final closing of the deal takes place. In the context of real estate, mergers and acquisitions, or other business transactions, the "closing" is the final stage where the agreement is fully executed, and the transaction is officially completed. Termination prior to closing allows the parties to withdraw from the deal before it is finalized, typically due to changes in circumstances, failure to meet conditions, or mutual consent.
For example, in a real estate sale, either the buyer or the seller may terminate the contract if certain conditions are not met (such as the buyer not securing financing) before the closing date.
Why is termination prior to closing important?
Termination prior to closing is important because it provides flexibility for both parties to back out of the agreement without further legal consequences if certain conditions are not met. This clause is often included in contracts to protect each party from being forced into completing a transaction that no longer aligns with their interests or expectations. It is particularly useful in situations where one party might fail to meet specific contingencies, such as securing financing, completing inspections, or obtaining necessary approvals.
For businesses, this provision helps mitigate risk and provides an exit strategy if the transaction is no longer favorable or feasible. It ensures that neither party is bound to a deal that no longer makes sense due to unforeseen circumstances or changes in the market.
Understanding termination prior to closing through an example
Imagine a company in the process of acquiring another company. The acquisition agreement includes a clause that allows either party to terminate the deal if certain conditions (such as regulatory approval or the due diligence process) are not satisfied before the closing date. If, during the due diligence process, the acquiring company discovers significant financial issues with the target company, it may choose to exercise the right to terminate prior to closing.
In another example, a homebuyer may have an agreement to purchase a property but includes a termination clause in the contract allowing them to back out if they cannot secure financing by the closing date. If the buyer fails to get approved for a mortgage, they can cancel the deal without penalty before the closing.
An example of termination prior to closing clause
Here’s how a termination prior to closing clause might appear in a contract:
"Either party may terminate this Agreement prior to the closing date if any of the following conditions are not met: (i) the Buyer fails to secure financing by [date], (ii) the Seller fails to provide the required documents for transfer of ownership, or (iii) any regulatory approvals are not obtained. Upon such termination, neither party shall have any further obligations or liabilities under this Agreement, except for those specified in the event of termination."
Conclusion
Termination prior to closing gives parties in a transaction the ability to back out of the deal before it is finalized, providing flexibility and protection against unforeseen issues or changes. This provision is crucial in real estate, business acquisitions, and other transactions where conditions must be met for the deal to close successfully. By including a termination prior to closing clause, parties ensure they are not locked into an agreement that no longer aligns with their goals or circumstances.
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.