What Are Contingencies and Why Are They So Important?

By Sandy Gadow—A contingency is a condition in a Purchase Agreement which states that the agreement is reliant upon certain events taking place, such as approval of a building inspection, delivery of marketable title, obtaining acceptable financing or mortgage commitments, even meeting building code compliance. Contingencies are vital to your closing because they eliminate any ambiguity over who will pay for what, and allow a legal way for one or the other party to cancel the agreement. Once contingencies have been removed, the closing can take place.

Contingencies can be written for most any type of eventuality, depending on state law. For example, a contingency clause can be written to provide that a seller/builder plant certain trees in the yard before completion, that the buyer be allowed time to sell his existing house before closing, that the buyer’s approval is necessary of the title report, soil report, property inspection reports, or of his attorney’s approval of the purchase contract. The seller may include contingency clauses which allow extra time after closing for moving, or which limit the amount of money available to pay for repairs.

Contingencies will contain a time limit in which to fulfill the task. For example, an inspection contingency may give the buyer 10 days in which to obtain and approve a pest or termite control report. Another contingency may allow 5 to 10 days for the buyer to obtain a written loan commitment. The seller is generally given a certain number of days in which to deliver “marketable title” or a title report to the buyer. The buyer then can review the exceptions listed in this report, and dispute any items which are in question. One common example of a title exception may be an easement. If a buyer is planning on adding a swimming pool, for example, in an area where an easement exists, the buyer may want to be sure this will be acceptable. The purchase contract may be contingent on an acceptable soil report, if the buyer suspects the house sits on unstable ground.

Once a contingency has been approved, both the buyer and seller should sign a document removing that contingency from the purchase contract. This agreement should be given to your closing agent and real estate representative. If the deadline for a contingency arrives, and both parties do not sign off on that contingency, this failure to act serves as acceptance of the contingency. For this reason, it is important to keep a calendar of the dates for removal of each contingency.

Contingencies help prevent problems at closing by eliminating last minute disputes covering inspections, the buyer’s inability to obtain financing, or repair work not being done according to contingency specifications.

TIP: Contingencies protect both parties from any surprises and leave a way out of the contract. They should be carefully drafted and can be made specific to your particular transaction.