Contingency provisions describe an event, activity or condition which needs to occur before the purchase agreement transaction can proceed toward closing. On the occurrence of the event or approval of information described in a contingency provision, the contingency has been satisfied and is no longer an obstacle to further performance and closing.
Contingency provisions authorize the buyer or seller to cancel the transaction when:
- the described event fails to occur; or
- the information received is disapproved.
Contingency provisions stating conditions allowing for the termination of an agreement are separated into two categories:
- event-occurrence contingency provisions — those provisions satisfied by the existence, completion or outcome of an activity or event which eliminates the contingency; and
- further-approval or personal-satisfaction contingency provisions — those provisions satisfied by the receipt, review and approval of data, documents and reports which eliminate the contingency.
Event-occurrence contingency provisions address the occurrence of specific activities and events, such as:
- the sale or acquisition of other property by the buyer or the seller;
- obtaining purchase-assist financing;
- the approval of building permits; and
- the elimination of title conditions, or the release of encumbrances, such as liens or leases.
Further-approval contingency provisions address the right of the buyer or seller to cancel the transaction on their disapproval due to unacceptable property conditions and
material facts, such as:
- disclosures and inspection reports concerning the physical integrity and natural and environmental hazards of the property;
- title reports; and
- rental income and expenses.
To terminate a purchase agreement under a contingency provision, the buyer or seller needs to have a reasonable cause to cancel for the cancellation to be enforceable. When a reasonable basis exists, they may avoid enforcement of the purchase agreement by the other person by notice of cancellation.
Contingency provisions contained in purchase agreements are eliminated by either:
- satisfaction of the contingency provision by the occurrence of an event or by someone’s approval of the conditions contained in information, data, documents or a report; or
- waiver or expiration of the contingency provision.
Contingency provisions are unique as they deal with uncertainties at the time an agreement is entered into. As a matter of good practice, contingency provisions are included in purchase agreements to eliminate any uncertainty about aspects the property’s title, income/expenses or physical condition. Before escrow is able to close, contingency provisions need to be eliminated.
Remedies available to buyer when the seller a materially breaches a purchase agreement contract include:
- abandoning the transaction by entering into a mutual cancellation of the purchase agreement and escrow instructions
- acquiring the property by pursuing specific performance of the purchase agreement
- pursuing the recovery of money, whether or not the buyer still wishes to acquire the property
For example, when the seller resells the property to another buyer at a higher price after accepting an offer from the original buyer, the original buyer may pursue specific performance and demand the seller adhere to the purchase agreement.
However, if the original buyer decides not to pursue specific performance, the seller is liable to the original buyer for the difference in price. A buyer’s money claims include:
- general damages, money directly expended or the monetary value lost in the transaction
- special damages, money collaterally lost due to the seller’s breach
- prejudgment interest at the rate of 10% on all monies recovered.
A buyer is allowed to recover expenditures incurred prior to a seller’s breach to prepare a property so they can take possession, such as construction costs advanced by a buyer for upgrades and alterations. However, the purchase agreement by its provisions needs to reflect the intention of the buyer to incur these expenditures.
Conversely, a seller of real estate faced with a materially breaching buyer needs to promptly decide whether to:
- enforce the purchase agreement;
- remarket the property for sale; or
- retain the property and postpone or entirely forego any resale effort.
A seller’s total recoverable losses when promptly remarketing and reselling the property include:
- carrying costs of mortgage interest payments, taxes, insurance, maintenance and utilities incurred by the seller and interest on the seller’s net equity between the date of the breach and the date escrow closed on the resale less the property’s rental value when the seller remains in possession; and
- any reduction in the seller’s net proceeds on the resale below the net proceeds the seller was to receive from the breaching buyer’s transaction due to:
- the increased closing costs the seller additionally paid, such as the new buyer’s nonrecurring closing costs, financing fees on the resale and mortgage prepayment penalties; and
- any decline in the property’s resale price.
When the seller takes the property off the market or is not diligent in their resale efforts, their recovery of money is limited to their out-of-pocket transactional expenses, property operating expenses incurred before the buyer’s breach, and any move out and move back relocation expenses to fulfill their performance under the purchase agreement.
When the seller remains in occupancy through the date of the breach, these costs are offset by the rental value of the property.
Arbitration in real estate transactions is one form of dispute resolution.
Persons who are parties to an agreement may grant an arbitrator the authority to hear their dispute and resolve it for them instead of initiating a lawsuit in a court of law. On conclusion of the hearing, the arbitrator issues a binding award in favor of one of the parties.
In home sales transactions, the buyer and seller agree to binding arbitration by initialing an arbitration provision in their purchase agreement. As a private process, binding arbitration avoids court costs of litigation and thus expedites the dispute resolution process.
However, binding arbitration requires the buyer and seller to give up their rights to a jury trial and any appeal from the arbitrator’s decision. The arbitrator’s award is final and a judicial review is not available to correct any type of error, even when the arbitrator incorrectly applies law or assumes facts that do not exist.
Judicial protection by appeal from an arbitrator’s award is only available when:
• the parties to the agreement have agreed the arbitrator’s award is subject to “judicial review”; or
• the arbitrator exceeded their powers set by the arbitration provision.
Some pre-printed purchase agreements contain boilerplate arbitration provisions. However, agreeing to bring any future disputes to arbitration by initialing the provision is voluntary. All purchase agreements contain a resolution-by-mediation provision as a prerequisite activity to arbitration.
In a home sales transaction, the buyer and seller separately need to decide, with the counsel of their agent or attorney, whether to agree to the limitations of binding arbitration by initialing the arbitration provision in their purchase agreement.