Similar to many types of contracts, a contract for the purchase or sale of a home becomes binding the moment that both the buyer and seller have signed the agreement. However, the majority of these types of contracts contain contingency clauses, which outline certain conditions that must be met in order to complete the sale of the home.
On the other hand, if the conditions provided in the contingency clause are not met, then the parties may back out of the contract without fear of facing any legal ramifications. Thus, while it is important that you include contingency clauses in purchase sale agreements for a home, they can sometimes serve as a double-edged sword.
What Are Contingency Clauses?
As previously mentioned, a contingency clause is a type of clause that can be found in a contract, which contains certain conditions that must be met before the buyer and seller can officially complete the final sale transaction. Again, if the conditions described in the contingency clause are not met, then the contract will become null and void. It will also allow a party (usually the buyer) to back out of the agreement without any legal consequences.
There are a number of different types of contingency clauses that can be found in contracts for the purchase or sale of a home. Although the parties are free to draft their own conditions, the most commonly used contingency clauses in such contracts include the following:
- Subject to inspection clause: A buyer can change their offering price without fear of facing legal consequences if they are not satisfied with the results of a professional inspection of the home. For example, if the seller claims there is no water damage or black mold and a professional inspection report concludes otherwise, then the buyer can change the terms of the deal or negotiate with the seller for a better price.
- It should be noted that this type of contingency clause is sometimes referred to as an appraisal contingency.
- Insurability clause: Another type of condition that may be found in a contingency clause is one that provides the home must be proven to be insurable before the sale can go through. This condition may be required if a lender or seller requests it. However, if the buyer is not able to obtain homeowner’s insurance before the closing due to geographical reasons, then the buyer will have the option to back out.
- Subject to financing clause: If the buyer cannot secure a home loan, mortgage terms, and the maximum interest rate that they desire (usually included as part of the sales contract), then the buyer may legally walk away from the sale.
- Specific repairs or changes clause: The buyer and seller may include a clause that states the sale of the home is contingent on the seller making any of the repairs or changes that the buyer requests. For example, if the buyer says they will only purchase the home if the seller fixes the roof first and the seller agrees to make the necessary repairs, then the buyer will be required to purchase the home if this and all other contingencies are met.
- Subject to sale of home clause: If a buyer is having trouble selling their current home for the asking price, then the buyer may be able to back out of purchasing the new home without any legal ramifications. This clause may also include the length of time that a buyer has to secure the sale of the property.
- Kick-out contingency clause: To combat the effects of a sale of home clause, a seller may use a kick-out contingency clause as a form of protection. Basically, this clause will say that a seller can back out of the deal if they can find a more qualified buyer to purchase the home. The buyer will have a specified amount of time to complete the transaction. However, the seller can keep the home on the market during this time.
- If the buyer fails, then this will allow the seller to walk away without any legal consequences or to sell it to another buyer.
- Encumbrance free clause: The parties may also contract to include a clause that requires the title to be lien-free. If the buyer discovers that the title is not lien free and the seller does not cure this issue by the time of the closing date, then the buyer will not need to go through with purchasing the home.
What if the Contingencies Are Satisfied, But the Buyer Still Backs Out of the Sale?
A buyer who backs out of the sale of a home after all of the contingencies have been satisfied may face many serious consequences. At the very least, the buyer is sure to lose the deposit they placed on the home. Also, if the home purchase sale agreement contained a liquidated damages clause, the buyer may also be on the hook to pay additional monetary damages to the seller for breaching their agreement.
In addition, if the seller is forced to sell their home to a different buyer at a lower price, then the buyer who is backing out may be liable for the remaining difference in price and may potentially have to pay extra monetary damages, such as attorneys’ fees. However, if the seller cannot find another buyer to purchase the home, then the seller can sue the buyer for specific performance and force them to purchase the home regardless.
What if the Contingencies Are Satisfied, But The Seller Still Backs Out of the Sale?
If a seller backs out of the sale of a home after all of the contingencies have been satisfied, then the buyer may be able to sue the seller for specific performance. If the buyer prevails in a lawsuit for specific performance, then the buyer can force the seller to give them the deed to the home; effectively, making them the new owner of the home.
Another benefit that a buyer receives when they file a lawsuit for specific performance is that while the case is pending (i.e., “lis pendens”), the lawsuit will typically be recorded against the title of the home to prevent the seller from selling the home to a different buyer.
In addition, if the buyer can prove that the seller committed intentional fraud, then the buyer may be able to sue the seller for supplemental punitive damages.
Do You Need a Real Estate Lawyer?
Contracting for the purchase or sale of a home can be very complicated. There are many factors that must be considered and various legal requirements that must be met when drafting the official contract. Therefore, if you wish to enter into a transaction to buy or sell a home, then it may be in your best interest to hire a local real estate attorney as soon as possible.
An experienced real estate attorney can help you draft and/or review a purchase sale agreement before you sign it. Your attorney can also make sure that any contracts related to the sale or purchase of a home are valid and legally enforceable (e.g., listing agreements with brokers).
In addition, if you need to back out of your agreement, your attorney can also determine whether you might face any legal consequences for your actions and can discuss what may happen after you do so. Alternatively, your attorney can also help you pursue remedies if the other party backed out of the agreement after all of the contingencies were satisfied.
Lastly, if you need to file a lawsuit against the other party to recover monetary damages, your attorney will be able to assist you with this process as well.