Closing Conditions in Business Deals and Real Estate

Key Takeaways

• Closing conditions are requirements that must be satisfied between signing an acquisition or purchase agreement and the official closing date.
• They protect both buyer and seller by ensuring the business or asset retains its expected value during the interim period.
• Common categories include buyer-specific conditions, seller-specific conditions, joint conditions, regulatory approvals, financing arrangements, and deliverables.
• Time intervals typically run 60–120 days but can extend if regulatory approvals or financing delays occur.
• Failure to meet closing conditions can allow either party to walk away from the deal without penalty.
• Negotiations often center around “material adverse change” (MAC) clauses, bring-down of warranties, and third-party consents.
• Closing conditions play a vital role in risk allocation, deal certainty, and protecting against post-closing disputes.

What Are Closing Conditions?

A closing condition is a requirement each party involved must satisfy between the first acquisition agreement and the closing date. As such, most purchases are not completed (i.e., they do not "close") when everyone signs the Purchase Agreement. There are still some tasks left to do before finalizing the purchase. These tasks are called closing conditions.

Closing conditions are found in sale and Purchase Agreements. They state the conditions both the buyer and seller must meet. There can also be joint conditions.

Most people who have purchased a home are familiar with closing conditions. For instance, one closing condition might be that the seller agrees to fix the house's broken window before the buyer can close. It's the same concept in business acquisitions.

Closing conditions can include:

• Provisions that each party's warranties and representations are valid as of the closing date
• Provisions stating warranties and representations have been met by all parties involved
• If applicable, approval given by government authority for the transaction to occur
• Joint conditions recognizing the transaction is legal
• Buyer conditions that the seller gets third-party consent, such as from suppliers
• Joint conditions that no pending legal problems would prevent closing
• Deal-specific conditions by the buyer that certain issues are addressed before closing

Sample conditions before closing may include:

• The seller has complied with all covenants
• All the seller's warranties and representations remain true
• The buyer has been satisfied with his or her due diligence investigation
• The seller has received all required consents and authorizations
• There are no opposing changes in the seller's business
• The buyer has secured financing to fund the purchase

Failing to meet any of these closing conditions gives any party involved in the transaction the right to walk away from the deal.

Types of Closing Conditions

Closing conditions can be grouped into several categories, each serving a specific function:

• Buyer Conditions: Protect the buyer by ensuring the seller delivers on key promises, such as securing financing or obtaining required third-party consents.
• Seller Conditions: Ensure the buyer performs obligations, such as paying the purchase price or confirming financing.
• Joint Conditions: Apply to both parties, such as the requirement that no legal action prevents the transaction.
• Regulatory and Government Approvals: May include antitrust clearances, industry-specific licenses, or foreign investment approvals.
• Deliverables: Documents required at closing, including stock certificates, escrow agreements, lien releases, and employment agreements.
• Material Adverse Change (MAC) Clauses: Allow a buyer to walk away if the seller experiences a significant negative event (e.g., major litigation, loss of key customers, regulatory sanctions) between signing and closing.

What Are the Time Intervals for Closing Conditions?

The time interval for closing conditions happens between signing the agreement and the closing date. This interval is set aside to allow everyone to complete closing tasks. In most cases, this time interval lasts for 90 days unless regulatory approval requires an addition amount of time.

However, this time interval can add complications to a business when the business is still in operation and required to make changes. These changes could include staff, customer contracts, account payables and receivables, and even litigation issues.

If you're buying a business, unless the closing conditions are satisfied by the seller by the closing date, then you have the right to refuse to complete the purchase.

Negotiating Closing Conditions

Closing conditions are heavily negotiated in both real estate and M&A transactions. Buyers typically push for broad protections to preserve deal value, while sellers aim to limit conditions to avoid uncertainty. Key negotiation points include:

• Scope of MAC Clauses: Sellers prefer narrower definitions to prevent buyers from using small changes as a reason to exit.
• Bring-Down of Representations: Parties may negotiate whether warranties must be true both at signing and at closing, or just at closing.
• Third-Party Consents: Buyers often require consents for key contracts or leases; sellers may argue only “material” contracts should be included.
• Timing Flexibility: Parties may build in extension rights for regulatory approvals or financing delays.
• Termination Rights: Agreements define when parties may walk away without liability if conditions are not met.

Why Are Closing Conditions Important?

Closing conditions are important to meet during the timeframe between the signing and closing date. All parties involved want to be sure the business' or home's value is maintained, and they want to protect the deal. There are several promised pre-closing behaviors everyone involved must stick to:

• The seller cannot negotiate with or seek other buyers
• The seller cannot create a competing company, ask customers to move to a different supplier, or hire employees from the business into another business. This agreement is good for a stated period even after closing.
• The seller must get the buyer's permission before taking actions that could change the business' value. This can include acquiring a major investment, limited normal capital investment, or signing a major contract. In the event that any of these occur and the seller needs to ask the buyer's permission, the buyer must respond in a reasonable, timely manner.
• The seller might have to take actions to allow the buyer to take advantage of post-sale opportunities.
• Neither party can announce the details of the transaction without the other party's consent. The one exception is when they are required by law to do so.

Naturally, a buyer wants to have some promise that the business value remains as high as it was at the time of signing. The seller needs to offer certain reassurances through warranties and representations as part of these closing conditions:

• All agreed-upon pre-closing behaviors have been met between the signing and closing date
• All warranties and representations agreed upon are correct at closing. There are exceptions to any updates to disclosure schedules
• No changes that could adversely affect the business have occurred since signing the Purchase Agreement
• No litigation has come up that could keep the transaction from happening
• The buyer guarantees to certain post-closing actions, such as offering an employee benefit plan for a set amount of time

Deliverables also come into play. These are documents required by the buyer that won't become available until after signing the Purchase Agreement. The seller must offer these documents on the closing date as part of the closing conditions.

Typical deliverables include:

• Regulatory licenses, approvals, permits, etc.
• Board of directors and stockholder consents to the transaction
• Agreements such as employee retention and financing agreements
• Certificate stating the accuracy of the company's formation
• Third-party consent forms, such as contracts and leases
• Release of litigation settlements and liens
• Standard deal documents, including the bill of sale for assets and escrow agreements

Another important part of closing conditions is termination rights. The parties agree that the transaction can be cancelled:

• If both parties agree on the termination
• By one party if the other has not completed the closing conditions on time
• By one party if the other party has breached a warranty or failed to perform according to an agree closing condition
• If a legal issue makes the transaction illegal

Finally, the "Bring-Down" of representations and warranties make sure the other party's reps and warranties are correct at the time of the closing date. All parties have complied with the pre-closing agreements or covenants. There may, however, be extra negotiation as to whether the bring-down of reps and warranties should occur on the closing date or on both the closing date and signing date.

Risks of Not Meeting Closing Conditions

If closing conditions are not satisfied, the risks can be significant for both sides:

• For Buyers: Risk of acquiring a company with undisclosed liabilities, declining value, or missing regulatory approvals.
• For Sellers: Risk of losing alternative buyers, reputational harm, and wasted transaction costs.
• For Both Parties: Delayed closings can create uncertainty, disrupt operations, and lead to disputes over whether conditions were satisfied in “good faith.”

Courts often look at whether each party acted reasonably in attempting to satisfy conditions. Some deals include “efforts clauses,” requiring “reasonable best efforts” or “commercially reasonable efforts” to complete conditions before closing.

Frequently Asked Questions

1. What is a material adverse change (MAC) clause?

A MAC clause allows a buyer to terminate the deal if the seller suffers a major negative change before closing, such as financial losses or regulatory issues.

2. How long do parties usually have to meet closing conditions?

Most deals provide 60–120 days, though the period may be extended for regulatory or financing approvals.

3. Can closing conditions be waived?

Yes. Parties may mutually agree to waive certain conditions, such as minor consents or immaterial deliverables, if both sides still want the deal to proceed.

4. What happens if one party fails to meet its conditions?

The other party typically has the right to terminate the agreement, and in some cases, may pursue damages if the failure constitutes a breach.

5. Why are closing conditions important in M&A transactions?

They allocate risk, ensure transparency, and give both sides confidence that the business will remain stable and legally compliant between signing and closing.

If you're selling or buying a business, the closing process can seem overwhelming. Post your legal need here to receive free quotes from the top 5% of lawyers on UpCounsel to learn how you can make sure everything goes as smoothly as possible.