When you buy a shopping center, you are not buying the building. You are buying the rent. And in the weeks between signing and closing, that rent can walk out the door.
That is what the material adverse change clause, or MAC, controls. It decides who takes the loss when a major tenant leaves before the deal closes. Buyers and sellers fight harder over this clause than almost any other line in a purchase and sale agreement. Here is why, and how the strongest agreements resolve it.
The seller wants the buyer locked in
A seller wants speed and certainty. Once the buyer finishes due diligence, the seller wants that buyer committed, hard on the deposit, with no cheap way out.
The seller reasons as follows. Due diligence is the buyer’s chance to inspect the asset. After that window closes, the risk of something going wrong at the property should shift to the buyer. The seller does not want to hand the buyer a free exit whenever market conditions turn. So the seller pushes for no termination right at all once diligence ends.
The buyer wants an exit if the income drops
The buyer sees a different picture. The buyer is purchasing a stream of income. If that stream shrinks, the deal can stop making sense.
Consider a buyer who agreed to a price based on a rent roll anchored by a 45,000 square foot grocery store. If that anchor terminates its lease a month before closing, the numbers collapse. The buyer may no longer be able to finance the purchase at all. The buyer’s position is simple. Why close on an asset whose value has already dropped?
Both sides have a point. That is exactly why the clause gets contested.
The trouble with “material adverse change”
The phrase sounds precise. It is not. Courts have long noted there is no bright line for what counts as a material adverse change, which means an undefined clause all but guarantees a dispute.
A cracked sidewalk is not a MAC. Losing your anchor almost certainly is. But most events land somewhere in between. If the contract leaves the term vague, the parties end up arguing over it, often days before closing, with a deposit and a financing commitment on the line. Nobody wins that fight cleanly.
The fix is not to leave the standard open and hope. The fix is to define the term so tightly that both parties know the trigger before it happens.
Where good deals land
The workable compromise confines the buyer’s MAC termination right to a short list of serious, specific events, each tied to a major tenant. Three triggers do most of the work.
First, define “major tenant.” The term usually turns on size, measured by square footage, or by the share of total center income that tenant pays. Set that threshold in the contract so there is no argument later.
Then limit the termination right to these events. One, a major tenant terminates its lease. Two, a major tenant files for bankruptcy and rejects its lease, which lets it walk away and take its rent with it. Three, a major tenant goes dark under a “go dark” right, meaning it stops operating even while it keeps paying rent.
That third trigger matters more than it looks. A dark anchor signals a center in decline. It cuts foot traffic, and it can set off co-tenancy clauses in other leases that let smaller tenants slash their rent or leave too. One empty box store can unravel a center.
This list gives each side what it needs. The buyer gets real protection against the handful of events that actually break the deal. The seller gets certainty that a minor problem will not blow up the closing. Everything outside the list stays the buyer’s risk, which is what the seller wanted all along.
The takeaway
Do not fight over whether to include a MAC clause. Fight over how it reads. A vague clause protects no one and guarantees a dispute at the worst moment. A tight one, pegged to major tenant terminations, bankruptcy rejections, and go dark events, tells both parties where they stand before they ever get there.
Before you sign your next PSA, read the MAC clause first. If it does not define “material adverse change” and “major tenant” in plain, specific terms, that is not cleanup for later. That is the deal.
David J. Murphy is the Managing Attorney of Murphy PC, a Boston-based real estate and business law firm, and is Of Counsel to McDermott, Quilty, Miller & Hanley LLP. With over 20 years of experience, David counsels developers, sponsors, owners, and investors in commercial real estate transactions throughout New England and other states, with a focus on joint ventures, preferred equity, and complex deal structuring. He can be reached at dmurphy@murphypc.com or 617.993.0650.
This article is for general informational purposes only. It is not legal, financial, or investment advice and does not create an attorney-client relationship. Consult a licensed attorney before acting on anything discussed here. This may constitute attorney advertising.