“Drafting Contingencies,” continued. Click here for Part 1.
Right to Waive: The party benefiting from the contingency may agree to perform, without actually fulfilling the contingency. This is known as the right to waive, right of waiver, or right to excuse. This right is usually inherent in the agreement and does not have to be specifically included. In the case of a real estate purchase contract, a waiver should be written and signed by the waiving party.
Example: If an offer is subject to the buyer receiving $30,000 in gifted funds from his parents, but the parents do not come through with the money by the deadline date, and if the buyer has the money from another source, then the buyer can waive the condition by issuing a written waiver similar to, “Buyer waives the $30,000 gifted funds contingency.” Such a waiver will ripen the buyer’s duty to perform despite the nonoccurrence of receiving the money from his parents.
The party benefiting from a condition also has a duty to use reasonable due diligence to make sure the condition does occur.
Contingency Drafting
Proper contingency drafting requires answering at least these three questions:
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Who is to act?
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What is to be done?
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When is the contingency to be satisfied?
Usually, the party who must act is the party who will benefit from the contingency. In most cases, the acting party will be the buyer or seller.
If no specific time is included for the satisfaction or waiver of the contingency, a reasonable time for the nature of the contingency might have to be determined by a court. To avoid this situation, every contingency should have a deadline, also known as a date certain.
The contingency period deadline should be reasonable, taking into consideration its purpose.
Method of Satisfaction
Many buyers have had a contingency satisfied because they – or their agent – did not pay attention to the manner by which it was to be satisfied. How to satisfy a contingency is important, since the method may impose a burden on the benefiting party.
There are two methods to satisfy a contingency. These two methods are removal by an action or removal by silence (no action).
Outcome of Failure to Satisfy
Be sure to include in the contingency clause what is to happen if the contingency is not satisfied (or waived). Here are some common outcomes to consider:
The transaction becomes invalid: If the condition qualified by the contingency is not met by a date certain, the transaction is cancelled. “If the gifted funds are not received by October 22nd, the transaction is void.”
The contingency self-removes: If the benefiting party does not disapprove the contingency within the specified period, the contingency is self-removed. “If Buyer does not object within 10 business day, Buyer is deemed to have approved the condition.”
The agreement will be re-defined: When the contingency is not removed, a mechanism should be in place to resolve the problem raised by its non-removal. “If Buyer objects to the report within the 10 business days, Seller agrees to pay up to $1,500 for repairs. Any repair amount over $1,500 will be spilt co-equally between Buyer and Seller, up to $1,000 each. If amounts exceed the $1,000 each, then Buyer and Seller shall have 3-business days from receipt of repair bids by which to negotiate amounts paid. Failure to renegotiate in the 3-business days will void the transaction and all earnest money deposited will be returned to the buyer.”
5 Building Blocks for Drafting a Contingency Clause
A carefully drafted contingency is important for a successful real estate closing. Proper drafting should provide a blueprint for how to handle the qualified condition and what would happen if the contingency is not satisfied, waived, or excused. Use these questions when drafting a contingency:
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Who is to act?
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What is to be done by the individual who is to act?
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When is the contingency to be satisfied?
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How will the contingency be satisfied or waived?
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What will happen if the contingency is not satisfied or waived?
Using these drafting questions, here is how to create a basic home inspection contingency:
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Who is to act?
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Buyer
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What is to be done by the individual who is to act?
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Buyer may inspect the property and all elements thereof using inspectors of Buyer’s choosing.
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When will the contingency to be satisfied?
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Buyer shall have 10-business days after the date Buyer and Seller have signed this Agreement to give written approval of the inspection.
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How is the contingency satisfied or waived?
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Unless Buyer gives written approval of the inspection within the 10 business days, Buyer is considered to have disapproved the property.
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What will happen if the contingency is not satisfied, excused or waived?
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If Buyer disapproves the property, the transaction is void and all earnest money deposited by Buyer will be returned to Buyer.
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Put it all together: Buyer may inspect the property and all elements thereof using inspectors of Buyer’s choosing. Buyer shall have 10-business days after the date Buyer and Seller have signed this Agreement to give written approval of the inspections. Unless Buyer gives written approval, Buyer is considered to have disapproved the property. If Buyer disapproves the property, the transaction will be void and all earnest money deposited will be returned to Buyer.
Conclusion
The improper use of contingencies can have consequences. To limit liability, the National Association of REALTORS® suggests applying these three tests when considering the use of contingencies:
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Does the suggested contingency meet the precise needs of your client? This means to give some thought to the client’s needs for the contingency and attempt express them as clearly as possible.
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Is the suggested language and format consistent with the requirements of the transaction?
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Does the contingency conform with all relevant legal requirements applicable to the sale? For example, if the sale the result of a divorce will court or attorney approval be needed? These and other issues should be researched and addressed.
Commonly used in most real estate sale agreements, the contingency is a necessary tool to allow either a buyer or seller time to obtain information or for a crucial event to occur prior to becoming affirmatively obligated to perform the balance of the agreement. By following the principles and processes outlined in this course, the drafting of a specific contingency can become a simple process.
A contingency clause can be as short as one sentence or as long as several paragraphs. It is the responsibility of its author to make sure the contingency is precise and well written so that all parties to the agreement know what is to happen and by when. Licensees who learn to master their contingency authoring skills are sure to better professionals and be better able to protect their clients.
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