There are elements of a traditional real estate deal that are optional. You may choose from a variety of approaches to funding a transaction or securing appropriate management, but one thing that should be part of any CRE transaction is the confidentiality agreement.
This document, also called a non-disclosure agreement, can be either unilateral (one party must keep information confidential) or mutual. It’s designed to protect both parties from harm that can result from sharing sensitive information that comes to light during negotiations. This is a precautionary step; it addresses situations that could possibly occur in the future.
For this reason, someone with little experience in CRE might not see the need for a confidentiality agreement. In that case, it’s advisable to rely on the wisdom of those who’ve come before, and have seen the many twist and turns that information takes in the marketplace. Without the protection of this kind, others in the industry can use their knowledge of your financial arrangements, details on property ownership, and strategic information relating to your property to gain an advantage.
For real estate, a confidentiality agreement generally consists of 5 sections:
- description of the confidential information
- items that are to be excluded from the confidential information
- obligations of the receiving party
- time limitations
- miscellaneous provisions
Confidentiality can be a valuable commodity in CRE. Here are 2 solid reasons to incorporate these agreements into any transaction.
Reason #1: Prevent exposure of sensitive information
This type of agreement is often used when one or both parties wish to remain anonymous. It’s common in the case of high-profile buyers or sellers. The agreement prevents the general public or competitors from learning sensitive details about a company or individual. It helps them to keep their future plans, like marketing strategies or development plans, private.
Reason #2: Minimize “shopping the offer”
Especially when inventory is low and demand is high, a property that’s well-priced will likely receive multiple offers. In this situation, the listing agent may inform the agents of other prospective buyers of some of the details of an existing offer, hoping to get a better offer. The information that is disclosed by the listing agent varies, but in addition to the price offered, it may include the down payment amount or escrow stipulations. In any event, giving the competition access to these figures puts the buyer at a disadvantage. This is perfectly legal, so long as it is done with the seller’s permission, and can be avoided if a confidentiality agreement is signed.
As with any legal document, confidentiality agreements should be carefully examined. Violating this agreement is a breach of contract, and can result in a lawsuit. There can be severe penalties for this, so it’s advisable to have an attorney look the document over. Some agreements are more restrictive than others. Terms can be negotiated, so don’t sign an agreement that you can’t live up to, but do make it a part of the transaction.