Contingency Clause

Definition§

A contingency clause in a real estate contract describes specific conditions or actions that must be met for the contract to become legally binding. If these conditions are not satisfied within a set period, one or both parties may have the right to cancel the agreement without penalty. Contingency clauses provide a safeguard primarily for the buyer but can also benefit sellers depending on the terms set forth in the contract.

Examples of Common Contingency Clauses:

1. Financing Contingency: This clause ensures that the buyer can secure financing for the purchase. Should they fail to obtain a mortgage, the buyer can back out of the deal.
2. Inspection Contingency: Provides the buyer the right to have the property inspected and negotiate any repairs or withdraw if the report is unsatisfactory.
3. Appraisal Contingency: Stipulates that the property must appraise for the purchase price or more. If it appraises for less, the buyer can renegotiate the price or exit the deal.
4. Home Sale Contingency: Allows the buyer to make their purchase contingent on the sale of their current home.

Frequently Asked Questions§

Q: What Happens If a Contingency Clause Is Not Met?§

If a contingency clause is not fulfilled, the party benefiting from that clause can typically withdraw from the contract without penalties. For example, if the inspection contingency is not met because major repairs are needed, the buyer can choose to terminate the contract.

Q: Are Contingency Clauses Negotiable?§

Yes, all contingency clauses are negotiable. Both parties can agree to include specific contingencies or alter standard clauses based on their needs and the specifics of the transaction.

Q: Can Contingency Clauses Be Removed?§

Buyers and sellers can agree to remove or waive contingency clauses. However, this generally means forfeiting the protection those contingencies offer. A buyer who waives an inspection contingency, for instance, takes on the risk of unknown issues with the property.

Related Terms§

• Condition: A specific requirement that must be met in a contract. In real estate, conditions often refer to the obligations outlined in contingency clauses.
• Due Diligence: The period during which a buyer investigates a property before finalizing the purchase. This often involves satisfying contingency clauses like inspections and appraisals.
• Earnest Money: A deposit made by a buyer to show their commitment to the contract. If any contingencies are not met, the buyer may retrieve their earnest money upon exiting the contract.
• Binding Contract: A contract that is legally enforceable in a court of law. Contingency clauses must be satisfied for a contract to be binding.

Online Resources§

• National Association of Realtors
• American Bar Association - Real Property
• HUD - Home Buying Information

References§

1. National Association of Realtors. “Understanding Contingencies,” NAR, 2021.
2. American Bar Association. “Real Estate Law and Property Law,” ABA, 2020.
3. HUD - U.S. Department of Housing and Urban Development. “Home Buying,” HUD.gov, 2021.

Suggested Books for Further Studies§

1. “Real Estate Law” by Marianne M. Jennings
   Provides a comprehensive study of real estate laws, including contract contingencies and regulatory requirements.

2. “Real Estate Investing For Dummies” by Eric Tyson and Robert S. Griswold
   A practical guide that covers various aspects of real estate transactions, including the use of contingency clauses.

3. “The Book on Rental Property Investing” by Brandon Turner
   Focuses on property investing tactics and discusses the critical role of contingency clauses in protecting investors.

Real Estate Basics: Contingency Clause Fundamentals Quiz§