Contingencies in a Real Estate Agreement

When you enter into a real estate deal to buy or sell a home, generally the process starts with the buyer making an initial written offer. This can then progress to a purchase and sale agreement and finally to a completed transaction. Often, however, while both buyer and seller want the transaction to occur, there are a number of potential problems or obstacles that can get in the way of the deal going through. These potential problems need to be addressed in contingency clauses in order to protect both buyer and seller.

What are Contingency Clauses?

Contingency clauses in a real estate contract are clauses put in to allow either the buyer or the seller to walk away from the real estate transaction without penalty if a particular event should happen. They act as escape clauses so that neither a buyer nor seller has to go through with a deal that has become disadvantageous.

Two of the most common examples of contingency clauses used in real estate contracts include inspection clauses and financing clauses.   An inspection clause is included in an offer or contract by the buyer and stipulates that the buyer’s offer to purchase is contingent or dependent upon the results of a home inspection. Including this clause is absolutely essential because if a home inspection turns up significant flaws or defects, such as an unstable foundation or mold, the buyer doesn’t want to get stuck having to purchase a bad property or lose his deposit. A financing clause is included making the deal contingent on the buyer getting a mortgage for the property. This too is often vital because otherwise the buyer could lose his deposit if the bank wouldn’t lend him the money for the property.

While many contingency clauses are designed to protect buyers, sellers may include contingency clauses as well. For example, a seller might make the agreement contingent on their ability to find and close on a new home to live in so the seller doesn’t end up with no roof over his head if he ends up being unable to find a suitable property.

While contingency clauses protect both parties to the transaction, it is important that they are carefully written so that neither the seller nor buyer is at an undue disadvantage. For sellers, for example, the more contingency clauses included for the buyer, the greater the risk that the sale won’t go through and that the seller will have taken his property off of the market and lost valuable sales time for no reason. To ensure that the appropriate clauses are included to protect everyone’s interests in a fair manner, it is best to work with an experienced attorney when drafting real estate documents containing contingency clauses.

Case Studies: Contingencies in Real Estate Agreements

Case Study 1: Inspection Contingency

In this case, Mr. Smith made an offer to purchase a house and included an inspection contingency clause in the contract. The contingency stated that Mr. Smith’s offer was contingent upon the results of a home inspection.

During the inspection, significant structural issues were discovered, including an unstable foundation and extensive mold. As a result, Mr. Smith invoked the contingency clause and was able to walk away from the deal without any penalties.

This contingency protected him from purchasing a property with serious defects and losing his deposit.

Case Study 2: Financing Contingency

Mrs. Johnson found her dream home and made an offer to purchase it. Her offer included a financing contingency clause, which stated that the deal was contingent upon her securing a mortgage for the property.

Unfortunately, Mrs. Johnson’s loan application was denied by the bank due to unforeseen circumstances. Thanks to the financing contingency, she was able to back out of the agreement without losing her deposit.

This clause protected her from being obligated to purchase the property without the necessary funds.

Case Study 3: Seller’s Contingency

In this scenario, Mr. Brown listed his property for sale but wanted to ensure he had a place to live before closing the deal.

He included a seller’s contingency clause stating that the sale was contingent upon his ability to find and close on a new home. Unfortunately, Mr. Brown encountered difficulties in finding a suitable property within the specified time frame.

As a result, he invoked the contingency clause, allowing him to back out of the agreement without repercussions. This clause protected the seller’s interests and ensured he wouldn’t be left without a place to live.