What is an Escape Clause?
An escape clause is a provision included in a contract that grants one or more parties the right to terminate or cancel the agreement if specified conditions are not met or if certain events occur. This clause is designed to protect the interests of the parties involved by allowing them to withdraw from the contract under defined circumstances.
Examples of Escape Clauses
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Mortgage Contingency: A typical use of an escape clause in a real estate contract is a mortgage contingency clause. For example, Mary agrees to purchase Joe’s house for $100,000. The sales contract includes an escape clause that allows Mary to cancel the contract if she is unable to secure mortgage approval for $80,000 within 60 days.
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Inspection Contingency: Another example is an inspection contingency. Suppose Kevin agrees to buy a townhouse but includes an escape clause that permits him to back out of the purchase if a home inspection reveals significant structural issues or other costly repairs.
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Sale of Buyer’s Property: In this scenario, Sarah agrees to buy a new home on the condition that she sells her current home first. The escape clause in her contract allows her to cancel the purchase of the new home if her existing property does not sell within a specified period.
Frequently Asked Questions (FAQs)
Q: What is the primary purpose of an escape clause in a real estate contract? A: The primary purpose is to protect a party in the transaction, such as a buyer, by providing a way to cancel the contract if certain conditions, such as mortgage approval or satisfactory inspections, are not met.
Q: Can both buyers and sellers benefit from an escape clause? A: Yes, while escape clauses are more commonly associated with buyers, sellers can also include conditions that allow them to terminate the contract if specific contingencies are not met.
Q: Are escape clauses negotiable in a real estate contract? A: Yes, escape clauses are negotiable terms and can be tailored to fit the specific needs and risk tolerance of the parties involved in the contract.
Q: How does an escape clause affect the earnest money deposit? A: If an escape clause is triggered, the buyer might be entitled to a refund of their earnest money deposit, depending on the terms of the contract.
Related Terms
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Contingency (or Contingency Clause): A condition that must be met for a real estate contract to be binding. If contingencies are not fulfilled, parties can terminate the contract without penalty.
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Due Diligence: The comprehensive appraisal of a property to establish its assets and liabilities as well as evaluate its commercial potential.
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Rescission: The cancellation of a contract with the objective of restoring the parties to their positions prior to the contract’s execution.
Online Resources
- Real Estate Contract Contingencies: An informative guide on different types of contingency clauses found in real estate contracts.
- Nolo’s Escape Clauses in Contracts: A resource by Nolo outlining how escape clauses function in various contexts.
References
- Real Estate Law Exam Prep - Merriweather Johnson
- The Everything Real Estate Investing Book - Janet Wickell
Suggested Books for Further Studies
- “Real Estate Investing For Dummies” by John A. Yoegel: A practical guide that provides understanding of real estate investment principles, including contract provisions.
- “What Every Real Estate Investor Needs to Know About Cash Flow” by Frank Gallinelli: Essential reading for understanding the financial implications of real estate contracts and escape clauses.
- “Real Estate Law (Real Estate Series)” by Marianne M. Jennings: A comprehensive textbook for detailed study of real estate contracts including provisions like escape clauses.
