Simply put, a contingency is a part of a contract which allows a party to walk away from the deal without penalty, if specific conditions are not met. A contingency clause defines the conditions and/or actions that must be met in order for a real estate purchase agreement to become legally binding. As such, if a contingency appears in a real estate purchase agreement or in the property’s listing, it generally means that there is an accepted offer on the property. However, there are still steps to be taken before the contract binds both parties involved.
Contingencies may act as a sort of escape plan, as they allow either the buyer or seller to walk away from the deal if the specified contingencies are not met. An example of this would be if the buyer is having issues securing a mortgage for the property. The contract may be broken with no penalties to either the buyer or the seller.
In most real estate contracts, there is a period of time between signing the contract and actually closing the sale. This period of time is known as escrow. During escrow, most (if not all) contingencies are expected to be fulfilled. If those contingencies are not met by the final closing date, either party has the right to cancel the purchase contract without facing any sort of penalty. Contingencies can be beneficial for either party, depending on the circumstances.
What Are Some Common Examples of Real Estate Contingencies?
It is not uncommon for several different types of real estate contingencies to appear in the same real estate purchase agreement. The most common examples include:
- Financing or Mortgage Approval: Generally, real estate sales contracts are contingent upon the buyer securing financing. This could include a mortgage loan, which they would then use to purchase the property. The most typical agreement consists of agreeing to purchase the property on the condition that you are able to obtain a mortgage loan of at least 75% of the purchase price;
- Inspector’s Report or Appraisal: Most real estate contracts specify that the buyer has the right to have a building inspector evaluate the property for any potential defects, zoning issues, or other problems. In terms of a foreclosure sale, the deal could be contingent upon the buyer accepting the property as is. A real estate sale could be contingent upon an appraisal, which ensures that the property is worth the selling price. If the appraisal reveals a price lower than the selling price, there will generally be further negotiations in order to see if the seller will lower the price. The real estate purchase agreement could be voided if the seller does not lower the price; and
- Renovation and Improvements: A common contingency may be that one party determines that the property can be renovated to their satisfaction. Such contingencies are more common as commercial real estate contingencies than residential.
Some other examples of various real estate contingencies include:
- Insurance approval, as the buyer would not want to close on a property if they were unable to get homeowner’s insurance for any reason;
- Closing date, which is generally utilized by the seller to ensure that they can back out of the purchase if the buyer cannot fund the deal by that date;
- Sale of previous property, which would state that the purchase of a new home is contingent upon the closing on a sale of another; and/or
- Satisfactory walkthrough, which is requested by the buyer.
The law does allow either the buyer or seller to propose nearly any sort of contingency during the negotiations of a real estate purchase agreement. However, this does not mean that either the buyer or the seller will actually accept the contingency. Contingencies are very commonplace in real estate transactions, although some contingencies proposed by either party may cause issues which hinder the selling process.
What Are the Common Contract Contingency Issues a Client May Experience?
Contingencies exist to reduce or eliminate potential conflicts, or legal disputes, that may arise from a real estate agreement. As such, there are few examples of when a contract contingency may cause issues for a client. For example, one of the most common types of real estate contingency is a home inspection contingency. A home inspection contingency essentially gives the buyer of the real estate property an out if the inspection of the property is unsatisfactory.
Typically, a minor issue with the home inspection, such as minor damage to the walls, would not allow a buyer to back out of the contract. However, major issues such as cracks in the foundation, leaks, or termites would likely allow the buyer to back out of the contract pursuant to a home inspection contingency. Legal disputes often arise as to what qualifies as minor or major when it comes to a home inspection contingency.
Do I Need an Attorney for Help with Real Estate Contract Contingencies?
Before signing any purchase agreement, whether for residential or commercial real estate, you should consult with a skilled and knowledgeable contract attorney. An experienced real estate attorney can review the contract and all of the included contingencies in order to determine whether the terms are legal and reasonable. They will also review the document to ensure your interests are protected.
Consulting with an attorney is a good way to safeguard your investment, as property purchases are often costly. An attorney can advise you on which contingencies you should include in a contract, and ensure that those conditions are properly fulfilled. Should any issues arise, the attorney will represent you in court as needed.