Welcome to the RealTown Real Estate Network!
Member Login | Join RealTown
The Real Estate Network

RealTown Words

A provision in a contract that requires the completion of a certain act or the happening of a particular event before that contract is binding. Often a buyer will submit an offer to purchase contingent on obtaining financing or rezoning. In such a case, the seller should be sure the contingency is specifically detailed and unambiguous and that there is a definite cutoff date; otherwise the buyer could tie up the seller’s property indefinitely while attempting to get financing or rezoning.

A party may waive any contingency clause that was inserted for his or her benefit. For example, the buyer could force the seller to sell the property even though the buyer was not able to obtain the zoning—the original contingency in the contract for sale. Contingency implies a promise to use one’s efforts to bring it about.
If a contingency is worded too loosely, such as “contingent on my deciding whether it is a good deal or not,” then the entire contract is considered “illusory” and unenforceable by either party due to lack of “mutuality of obligation.” If the sale is contingent on a “satisfactory” inspection or attorney’s review of lease, the courts will try to impose standards of good faith and reasonability so a party cannot back out just because of a change in that party’s plans.

A contingent sale is different from an option. In an option, the optionee has absolute discretion whether to exercise the option. In a contingency, the buyer must buy upon the occurrence or nonoccurrence of a specified event, such as loan qualification.

The financing contingency is not only the most frequently used contingency; it is also the most controversial. Even a well-written contingency statement can cause problems. For instance, assume that a financing contingency stated that the offer was contingent upon buyer obtaining a first mortgage loan commitment for $167,500 with interest not to exceed 7 percent per annum and for a term of not less than 30 years, and monthly payments for principal and interest not to
exceed $1140 plus Z\zx the estimated annual real property taxes and Z\zx the annual insurance premium. Buyers agreed to use good faith and due diligence in obtaining such loan. Buyers qualified for the loan but refused to take it because the lender added an interest rate escalation clause. Even though a court might allow some deviation in the financing commitment, the inclusion of an escalation clause is a material deviation of the terms of the offer to purchase and thus the buyer would not be in breach of the contract for refusing to complete the
purchase; the buyer is entitled to a return of the deposit money. However, a buyer who did qualify for financing on the terms stated in an offer but who later gets divorced or otherwise changes circumstances so as to not be qualified at the time of closing may have difficulty defending a lawsuit for enforcement of the purchase contract. Sometimes a cautious seller might add a clause to the effect that “the execution of any loan documents by the buyer shall be deemed to be an acceptance of such loan and a waiver of this contingency.”
Dearborn Real Estate Education
This "Word of the day" is excerpted from The Language of Real Estate, 6th Edition by John Reilly (published by Dearborn Real Estate Education, 2006 copyright). To purchase the complete book, with over 2800 key terms and definitions, or to browse through Dearborn's hundreds of other professional real estate titles, including Real Estate Technology Guide by Klein, Barnett, Reilly, click here.