The elimination of contingencies

In negotiations over the final contents of a purchase agreement, buyers and sellers frequently include provisions to place conditions on their rights and obligations to close escrow. Collectively, these are called contingencies.

Contingency provisions in a purchase agreement grant the authority, when used for good cause, to terminate the buyer’s obligation to pay the purchase price or the seller’s obligation to deliver title.

Contingencies describe an event or condition which the buyer or seller believes must occur or be approved before the purchase agreement transaction may proceed to closing. These contingencies need to be eliminated before an otherwise binding purchase agreement becomes fully enforceable, obligating the buyer and seller to perform and close the transaction.

Contingency provisions contained in purchase agreements are eliminated by either:

  • satisfaction of the contingency provision by the occurrence of an event or by a participant’s approval of the conditions contained in information, data, documents or a report; or
  • waiver or expiration of the contingency provision.

On the occurrence or approval as described in a contingency provision, the condition is said to be satisfied, such as the buyer’s receipt of a mortgage commitment or approval of delayed disclosures.

When a condition is not satisfied, the participant authorized or benefitting from the contingency may:

  • cancel the transaction by serving the other participant with a Notice of Cancellation [See RPI Form 183];
  • waive the contingency and proceed with the transaction by notifying the other participant the contingency has been waived [See RPI Form 182]; or
  • allow the expiration of the time period for cancellation to run.

Related Client Q&A:

Client Q&A: What are contingency provisions? Do I need them?

Satisfaction or cancellation

When the event or approval called for in the contingency provision does not occur, the participant with the right to cancel may waive the contingency provision or allow it to expire and proceed to closing. When the contingency provision is not waived or allowed to expire on failure of the event or approval to occur, the purchase agreement transaction may be terminated by the participant with the right to cancel. [See RPI e-book Real Estate Practice, Chapter 42]

The participant with the right to cancel may only exercise the right when they have a reasonable basis for the cancellation. When a reasonable basis exists, they may avoid enforcement of the purchase agreement by the other participant.

To exercise the right to cancel, a notice of cancellation is delivered to the other participant during the period for timely exercise of the right to cancel and in the manner prescribed in the cancellation provision. [See RPI Form 150 §11.5]

Colorful jargon in the real estate industry has tagged contingency provisions with such titles as “weasel clauses,” “escape clauses” or “back-door provisions.” These titles suggest a misunderstanding of the proper ability to use contingency provisions to cancel and avoid buying or selling the property when the participant wishing to cancel merely has a change of heart about proceeding with the transaction. Much more objectivity is required.

Related article:

Time to perform as staging a cancellation

Acting in good faith

The buyer or seller with the right to cancel based on a further-approval contingency has an obligation to fairly evaluate the condition to be approved or disapproved prior to cancelling the transaction, called acting in good faith.

The buyer or seller who attempts to terminate a purchase agreement under a right-to-cancel contingency without first acting to satisfy the contingency is taking an unfair advantage of the provision.

Failure to undertake activities necessary to make an informed decision about a condition does not allow a transaction to be terminated “at will,” simply because a contingency existed in the agreement. The participant cancelling needs to have cause to cancel for it to enforceable.

Approval by waiver

The objective of a buyers agent when a contingency provision in a purchase agreement is included for the benefit of their buyer is to provide the buyer with the ability to cancel the transaction when the event fails to occur or the condition is disapproved.

When the contingency provision is to be eliminated by approval (waiver) or expiration of the right to cancel, or exercised by cancellation of the purchase agreement prior to the date scheduled for the close of escrow, the buyer is to act by giving the appropriate notice to the seller as called for in the purchase agreement. [See RPI Form 150 §11.5]

When the condition reviewed is acceptable or the event occurs, the buyers agent may be required by the wording of the contingency provision to prepare a notice of waiver to eliminate the contingency. It is then signed by the buyer and handed to the seller, escrow or the sellers agent, as called for in the contingency provision. [See RPI Form 182]

The buyer may also waive the right to cancel and eliminate the contingency provision. Some retrograde purchase agreement contingency or cancellation wording require the buyer to also notify the seller of the buyer’s intention not to cancel.

Here, the buyers agent uses the same notice of waiver form used for an unequivocal approval to avoid losing the deal by giving the seller a reason to cancel. Not a productive provision, but these situations giving the seller a way out of a deal in a rising market exist based simply on the buyer remaining silent, when they do not cancel, that they will close as agreed. [See RPI Form 182]

Related article:

Cancellation excuses further performance

Cancellation for a valid reason

A seller or buyer occasionally refuse or are unable to hand escrow the instruments (funds and documents) needed to close the transaction or otherwise comply with the escrow instructions. Unless their nonperformance is excused, they have breached the agreement.

Nonperformance is excused and the refusal to act is not a breach of the purchase agreement, when:

  • a contingency provision exists authorizing the buyer or seller or the participant benefitting from the contingency to terminate the purchase agreement on the failure of an event to occur or on disapproval of data, information, documents or reports;
  • the event fails to occur or the condition reviewed is disapproved; and
  • a participant authorized or benefiting from the contingency provision acts to terminate the agreement by delivering a notice of cancellation prior to the expiration of their right to cancel. [See RPI Form 183]

When a valid reason exists which triggers the buyer’s or seller’s right to exercise their option to cancel and they choose not to serve a notice of cancellation on the other party, their option to be excused from further performance expires.

Related article:

Brokerage Reminder: Eliminating contingencies – reasonableness required

The waiver of contingency contents

An agent uses the Waiver of Contingency published by Realty Publications, Inc. (RPI) when a sale of property is subject to a contingency. The form allows the agent to prepare a notice for the signature of the buyer or seller to waive the contingency. [See RPI Form 182]

The Waiver of Contingency contains:

  • Facts: the contract which the waiver pertains to, the date of the contract, the contract participants and the real estate;
  • Agreement: a blank space for the agent to name the contingency being waived; and
  • Signatures of both participants. [See RPI Form 182]

The notice of cancellation contents

An agent uses the Notice of Cancellation — Due to Contingency or Condition published by RPI when a sale is the subject of a contingency provision that has not been satisfied and the transaction is to be cancelled. The form allows the agent to prepare a notice for their client to sign cancelling the transaction. [See RPI Form 183]

The Notice of Cancellation — Due to Contingency or Condition contains:

  • Facts: the contract which the notice of cancellation terminates, the date of the contract and the real estate;
  • Cancellation and Termination: the reason the cancellation is based on; and
  • Signatures of both participants. [See RPI Form 183]

Related article:

Form of the Week: Contingencies satisfied, expired or waived – Forms 182 and 182-1

Want to learn more about eliminating contingencies? Click the image below to download the RPI book cited in this article.