How Holdbacks Affect Music and Real Estate Transactions

In music, tempo markings frequently are written in Italian or in abbreviations of Italian words. One abbreviation that causes a lot of confusion is “Rit.” Most musicians know vaguely that that means to slow down the tempo. The confusion arises because there are several Italian musical terms for “slow down.” And making it more confusing, two of those terms begin with the letters R-i-t! 

Musical “Holdback” Terminology 

One word, ritenuto, refers to an immediate reduction of tempo. It is as if the musician slams on the breaks to suddenly drop in speed from 60 mph to 25 mph. 

The other “rit” word, ritardando, means something very different. Ritardando means a holding back or gradual reduction of tempo in a deliberate fashion, like a driver is gradually slowing down when approaching a red light. 

There is another Italian music term, rallentando, which also describes a gradual slowing down, but without the same sense of deliberateness. Rallentando is more like a car gradually slowing down because the driver has no foot on either the accelerator or brake but without engine braking. 

There is yet another Italian music term, trattenuto, which is similar to ritardando. Trattenuto means a holding back of the tempo without deliberation, like rallentando, but with a sense of sustaining the notes. In this way, trattenuto would be like driving a car without pressing either the accelerator or brake, but with engine braking adding a sense of drag to the reduction in speed. 

It is confusing to have three terms, ritardando, rallentando, and trattenuto, to describe a holding back of the tempo. Yet, each has its own nuanced meaning, which can be important in conveying a composer’s intentions. 

Legal “Holdback” Terminology 

Law also has a holdback concept which deals with the speed or time of performance. This type of holdback refers to delaying payment on part of a purchase price for a period time after the closing or performance of services. The purpose of this type of holdback is to protect a buyer or lender, in case a seller, contractor, or mortgage loan borrower fails to satisfy certain contingencies. 

In real estate law, this delay of payments usually called a holdback when used in real estate purchase agreements as security for seller or mortgage obligor post-closing obligations. In real estate development contracts, delay of payments to assure that a contractor completes the project is called a retainage. 

This article focuses on holdbacks in real estate acquisitions and financing. 

How Real Estate Buyers Use Holdbacks 

Frequently, lenders require that real estate owners be special purpose limited liability companies (SPEs). Lenders value the liability and bankruptcy protection the SPEs provide. However, those same liability protections might prevent a purchaser from recovering damages if the seller fails to follow through with an obligation. 

Therefore, many buyers require holdbacks to secure post-closing seller obligations. Holdbacks are most frequently used to protect the buyer in case one of the seller’s representations regarding the condition of the property turns out not to be true. 

However, a buyer might also use a holdback if amounts on a closing settlement statement are uncertain. For instance, if there is a pending property tax appeal that could cause additional taxes being due, the buyer might want a holdback in the amount of the estimated additional taxes. 

A buyer also might want a holdback is if the seller has agreed to make repairs after the closing. This can happen if inclement weather delays ongoing repairs beyond the closing date or if there is a casualty which requires repairs and either the insurance proceeds are not assignable or the repairs are ongoing. 

How Mortgage Lenders Use Holdbacks 

Sometimes, mortgage lenders will be the ones insisting upon the holdback. Lenders may use a holdback by not funding the entire loan at closing when the borrower has post-closing obligations. 

For instance, a lender might require a holdback of loan proceeds necessary to fund required repairs or renovations. Mortgage lenders also usually hold back loan proceeds to fund initial tax and insurance impounds and replacement reserves. 

Sometimes lenders will delay funding the full loan proceeds until the borrower meets lender conditions. Other times, the lender will fund the entire loan amount, but will put some funds in a holdback reserve. If a lender doesn't fund part of the loan, the lender keeps the “held back” funds. Therefore, the borrower pays no interest on those proceeds. 

But, when the lender funds the loan but then immediately puts part of the loan proceeds into a reserve fund held by the lender, the borrower will pay interest on the funds. Reserve and escrow funds rarely pay as much interest as the lender charges on the mortgage loan. So, borrowers should know if the lender funds loan proceeds into a reserve, they will be paying interest (and have negative arbitrage) on funds they do not have. 

Holdback Mechanics 

Strictly speaking, a hold back occurs only when the buyer holds onto part of the purchase price or the lender doesn’t fund some of the loan proceeds pending satisfaction of conditions. However, in practice, holdbacks usually work differently. 

In a real estate acquisition, the seller might not be willing to deed over its property for less than the full purchase price without knowing for sure the buyer will pay the rest. Often, the buyer will pay the entire amount at closing, but the title company will keep the holdback amount in escrow. 

The buyer, seller, and title company will sign an escrow agreement detailing the conditions the seller must satisfy to receive the escrowed funds. Once seller satisfies those conditions, the title company will release the holdback amount to the seller. If seller doesn’t satisfy the conditions, the title company will release the holdback amount to the buyer. 

Loan holdbacks can be either a true hold back of funding or a reserve fund. With a true holdback, the lender and borrower will agree upon the conditions that the borrower must satisfy for the lender to fund the rest of the loan. Upon satisfaction of the conditions, the lender will fund the rest of the loan proceeds. 

Alternatively, the lender frequently funds the entire mortgage loan amount at closing but doesn’t release all of the funds to the borrower. That works similar to the escrow when a buyer does not pay the entire closing cost, but with the lender holding the funds (usually called a reserve). Again, the parties will enter into a loan agreement detailing the conditions the borrower must satisfy for the lender to release funds from the reserve. 

In both situations, one question is the amount of the holdback. Some holdback amounts may be established in the real estate purchase contract between the buyer and seller. However, if the situation necessitating the holdback arises after the contract is signed, the parties will need to agree upon an amount. 

If the holdback is based upon a possible future tax liability, a typical holdback amount might be a generous estimate of the taxes, including possible penalties and interest. On the other hand, when the holdback is based upon a casualty or uncompleted construction, it is common for the holdback to be over 100% of the estimated restoration or construction costs. Commonly, the holdback amount will be 125% of the estimated costs. The final amount will depend upon the relative bargaining power and incentive of the parties to close the transaction. 

Lender holdbacks for post-closing repairs nearly always will be at least 125% (or more) of the estimated construction costs. It is not unheard of for lenders to require a holdback equal to 150% of the estimated post-closing liability or costs. Since holdbacks frequently are negotiated into loan documents only days before the closing, borrowers have little bargaining power to object to the lender’s request. 

Holdback Details 

Like the musical “holdbacks,” the holdbacks in real estate transactions have much in common. Yet, as with the musical “holdbacks,” there are nuanced differences which may change the character of the holdback. 

Composers should take consider the effect of their “holdback” language are more likely to convey the musical message they intend. Likewise, parties to a transaction should consider what holdback terms best meet their situation. When negotiating holdback terms, parties should consider the following: 

  • Who will hold the holdback? 

  • How much will the holdback be? 

  • Who will receive interest on the holdback? 

  • What conditions must be satisfied for the holdback to be released? 

  • May the holdback be released in increments? Or, must all conditions be satisfied before any amount is released? 

  • What documentation is required for a party to obtain release of the holdback? For a buyer holdback, must the buyer consent to release of funds? Or, may the title company determine on its own whether documentation is sufficient? 

  • What will happen to the holdback if the conditions never are satisfied? 

The terms will vary from transaction to transaction depending upon the circumstances. But, by agreeing on these important holdback details in advance, the parties can better protect their individual post-closing interests. 


© 2018 by Elizabeth A. Whitman 


Any references clients and their legal situations have been modified to protect client confidentiality. 

DISCLAIMER: The content of this blog is for informational purposes only and does not provide legal advice to any person. No one should take any action regarding the information contained in this blog without first seeking the advice of an attorney. Neither reading this blog nor communication with Whitman Legal Solutions, LLC or Elizabeth A. Whitman creates an attorney-client relationship. No attorney-client relationship will exist with Whitman Legal Solutions, LLC or any attorney affiliated with it unless and until a written contract is signed by all parties and any conditions in such contract are fully satisfied.