Real estate buyers may hesitate when a seller is in bankruptcy; extra care is often required. One of many possible bankruptcy-related transaction structures arise when a buyer strikes a deal directly with the bankrupt owner of the property or with the trustee in bankruptcy. The purchase and sale agreement requires the same due diligence and buyer protection provisions as any other, and will also deal with issues unique to the bankruptcy setting.
Here’s where price protection comes in: one issue of particular interest to buyers is that in bankruptcy real estate sales other potential purchasers will be bidding after buyers and sellers have negotiated a price and other terms. The bankruptcy trustee or judge will want bidders to offer the highest possible price, but the buyer, known in this context as the “stalking horse buyer” or “stalking horse bidder” will want to discourage bids higher than the negotiated price. These potentially higher bids are referred to as “overbids.” Many bankruptcy courts allow stalking horse bidders to be compensated if there is an overbid resulting in a sale to the higher bidder. The compensation, called a “break-up” fee, is typically a cash payment equal to a small percentage of the purchase price (3% or less). The bankruptcy court may also be willing to order other protections for the stalking horse bidder including requiring other bidders to match the stalking horse bid’s non-price terms, or allowing the stalking horse bidder to match the higher bid.
If you’re about to become a stalking horse bidder, be certain to engage real estate and bankruptcy savvy counsel to help identify the full range of price protections.