Contingency Clause
What Is a Contingency Clause?
A contingency clause is a provision that states that a particular action or event must happen before a legal contract is valid.
As a type of escape clause, a contingency clause allows either party to cancel the contract if the requirements are not met. Although they are most commonly seen in real estate contracts, this type of contract clause is also used in other purchase agreements and employment contracts.
What Is a Contingency Clause Example?
A contingency clause in a real estate purchase agreement might require that an appraiser make a full report on the value of the property or that the home passes inspection before the contract is valid.
A contingency contract also could specify that the buyer obtains a mortgage or meet other financial criteria before the deal is accepted. Another contingency could be that the buyer must sell their current home before the contract can close.
The buyer and seller must agree to the terms of each contingency and sign the contract before it becomes legally binding.
Contingency clauses also can be part of employment contracts. For example, a job offer could be contingent on an applicant passing a background check and a reference check. An employer also might make a job offer to someone they have only interviewed remotely. The job offer could be contingent upon an in-person interview.
What Happens If Contingencies Are Not Met?
Real estate brokers use the phrase “under contract” to describe this period when contingencies are in effect. Under a contingency contract, a buyer has made an offer, and a seller has accepted the offer. However, certain circumstances (contingencies) must be met for the sale to go through.
A contingency contract will specify a date by which the obligations must be met. In a real estate deal, the sale does not move forward if the buyer or seller fails to satisfy the contingencies. Any earnest money is returned to the buyer. The seller is then free to accept other offers, and the buyer can either try to re-negotiate the contract or move on with their home search.
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Why Contingency Clauses Matter
It is not necessary to have contingency clauses in a real estate contract. In fact, in a strong sellers’ market, some buyers waive them so that their offers stand out.
However, there is some risk involved in not having these provisions in a real estate contract. For example, a buyer might lose their earnest money deposit if they decide not to buy a home after making an offer.
You’re not required to include contingencies in any offer, but they do offer both parties some degree of protection. The contingency clause gives each party the right re-negotiate or cancel the contract if specific conditions are unsatisfactory. Here are three examples:
- Appraisal contingency: A buyer can back out of the deal if an appraisal by a professional property appraisal is lower than the specified minimum in the contract.
- Financing contingency or mortgage contingency: This allows the buyer time to obtain a mortgage and the ability to cancel the contract if financing is denied without losing their earnest money.
- Inspection or due diligence contingency: This type gives the buyer the opportunity to have the home examined by a professional inspector by a specified date. If unknown problems are discovered in the inspection, the buyer can either back out of the contract or require that the seller remedy the issues in a revised agreement.
However, the wording of any contingency clause should be precise. The contract provisions should clearly state the condition, how and when it is to be fulfilled, and who is responsible for fulfilling it. The clause should also say what happens if the contingency is not met in the specified timeframe.
Helpful Resources:
What Is A Contingency Clause When Selling A House?
The Real Estate Contingency Contract: 8 Common Clauses
Common Contingencies In Real Estate Explained | Bankrate
What Is a Contingent Job Offer? | Indeed.com
What Is a Contingency Clause?
A contingency clause is a provision that states that a particular action or event must happen before a legal contract is valid.
As a type of escape clause, a contingency clause allows either party to cancel the contract if the requirements are not met. Although they are most commonly seen in real estate contracts, this type of contract clause is also used in other purchase agreements and employment contracts.
What Is a Contingency Clause Example?
A contingency clause in a real estate purchase agreement might require that an appraiser make a full report on the value of the property or that the home passes inspection before the contract is valid.
A contingency contract also could specify that the buyer obtains a mortgage or meet other financial criteria before the deal is accepted. Another contingency could be that the buyer must sell their current home before the contract can close.
The buyer and seller must agree to the terms of each contingency and sign the contract before it becomes legally binding.
Contingency clauses also can be part of employment contracts. For example, a job offer could be contingent on an applicant passing a background check and a reference check. An employer also might make a job offer to someone they have only interviewed remotely. The job offer could be contingent upon an in-person interview.
What Happens If Contingencies Are Not Met?
Real estate brokers use the phrase “under contract” to describe this period when contingencies are in effect. Under a contingency contract, a buyer has made an offer, and a seller has accepted the offer. However, certain circumstances (contingencies) must be met for the sale to go through.
A contingency contract will specify a date by which the obligations must be met. In a real estate deal, the sale does not move forward if the buyer or seller fails to satisfy the contingencies. Any earnest money is returned to the buyer. The seller is then free to accept other offers, and the buyer can either try to re-negotiate the contract or move on with their home search.
Start Your Real Estate Purchase Agreement
Why Contingency Clauses Matter
It is not necessary to have contingency clauses in a real estate contract. In fact, in a strong sellers’ market, some buyers waive them so that their offers stand out.
However, there is some risk involved in not having these provisions in a real estate contract. For example, a buyer might lose their earnest money deposit if they decide not to buy a home after making an offer.
You’re not required to include contingencies in any offer, but they do offer both parties some degree of protection. The contingency clause gives each party the right re-negotiate or cancel the contract if specific conditions are unsatisfactory. Here are three examples:
- Appraisal contingency: A buyer can back out of the deal if an appraisal by a professional property appraisal is lower than the specified minimum in the contract.
- Financing contingency or mortgage contingency: This allows the buyer time to obtain a mortgage and the ability to cancel the contract if financing is denied without losing their earnest money.
- Inspection or due diligence contingency: This type gives the buyer the opportunity to have the home examined by a professional inspector by a specified date. If unknown problems are discovered in the inspection, the buyer can either back out of the contract or require that the seller remedy the issues in a revised agreement.
However, the wording of any contingency clause should be precise. The contract provisions should clearly state the condition, how and when it is to be fulfilled, and who is responsible for fulfilling it. The clause should also say what happens if the contingency is not met in the specified timeframe.
Helpful Resources:
What Is A Contingency Clause When Selling A House?
The Real Estate Contingency Contract: 8 Common Clauses
Common Contingencies In Real Estate Explained | Bankrate
What Is a Contingent Job Offer? | Indeed.com