On Bended Knee – Negotiating 101

On Bended Knee – Negotiating 101

It always helps to know what your client hopes accomplish in a transaction when you begin negotiations. It also helps to know the strength of your client’s position.  Otherwise, you can get your head handed to you.  And it is much better to be the one handing your opponent his head than the other way around.

I have been working with a client recently on the sale of some commercial real estate. My client really wants to sell this property and the assets associated with the business he operates on the property.  He is losing a lot of money in this business.  A business broker found a buyer in the same business who agreed to buy the property and the inventory of the business.  Both parties wanted to close very quickly.  However, the buyer would not be able to get financing in time and in fact, because of the size of the inventory involved, would need to tackle the inventory loan first and then wait for a few years before financing the real estate.  Not to worry.  My client was willing to consign the inventory and to purchase money financing on the real estate.

After the terms were negotiated by the broker, I prepared a contract and it was signed. Closing was to be in less than 3 weeks.  I started right away on the loan documents.  Buyer had a law firm acting as the title company who I assumed would be his attorney as well, but I never got a response.  Nevertheless, I sent my draft loan documents out as soon as they were ready.  My client and I had discussed that the loan documents had to be as if a bank were the lender because we were financing more than 85% of the purchase price and consigning the inventory.  Because we held 2 parcels of property in 2 different entities, there were 2 different sellers.  Thus, there would be 2 different lenders and 2 different mortgagees – 2 notes and 2 mortgages.  The notes and mortgages would be cross defaulted with each other and with the consignment agreement.

A few days before the scheduled closing date, the title company/law firm was retained to review the loan documents. They sent comments to me.  The buyer 1) did not want to enter into a consignment agreement, 2) saw no need for cross default provisions, 3) saw no need for assignments of leases and 4) thought the mortgage was too long (and thus gutted it).

My job was then to remind buyer and his lawyer that 1) he had no cash and no ability to obtain cash, 2) this was purchase money financing of more than 85%, 3) if buyer went to a bank, not only would the mortgage be at least as long as the one I had provided (probably longer), but there would be many more documents than I provided, all very long, including assignments of leases, and 4) if he didn’t like the structure of the loans or the forms of documents we were offering, he needed to find another lender because seller isn’t going to give you his property, including the inventory for under 15% down and the handshake you’re offering.

The moral of this story? It could be he who has the gold makes the rules, but that is tired and cliché.  Maybe it’s, before you swing for the fences, make sure you aren’t going to get knocked down by the pitch.