Dominic and Anna found the perfect house. They agreed to submit a contract to buy the house to the seller. Dominic and Anna must, however, secure financing in order to purchase the house. Accordingly, Dominic and Anna included a clause in the contract which specified that the consummation of their purchase of the house was contingent upon their securing adequate financing on acceptable terms.

Fact Scenario II

Xavier found a building that he felt was just right for his auction business. At the present time, however, the building is located in a residential zone. Xavier submitted a contract to buy the building. Xavier's purchase of the building was, according to the terms of the contract, contingent upon his obtaining a commercial zoning designation for the building.

Contingency Clauses in Real Estate Contracts

In the context of real estate transactions, buyers and sellers agree to contingencies. A contingency is a clause in a contract that allows a party to escape his or her obligations under the contract in the event that certain conditions are not met. For example, a buyer's obligation to close on a real estate contract may be contingent upon such things as:

• the buyer's ability to secure financing;
  
• an acceptable inspection of the property;
  
• the buyer's ability to obtain a zoning variance or some type of permit; or
  
• the buyer selling another property.

It is always a question as to whether a seller will accept a contract with a contingency clause. Usually whether the seller will accept a contingency depends upon the nature of the contingency itself, as well as the demand for the property at issue. In a seller's market, where the demand for real estate is particularly high, sellers may be unwilling to accept contracts with contingency clauses.

What happens if the parties agree upon a contingency, such as a satisfactory roofing inspection, and the contingency is not met? In such a circumstance, the parties have an opportunity to renegotiate that particular aspect of the contract. For example, the parties might agree that the requisite roofing repairs will cost $7,500 and that the purchase price of the property will be reduced by that amount.

With regard to any contingency clause, it is extremely important for the clause to be clear. Both the buyer and the seller should fully understand the nature of the clause. A clear understanding by both parties to the agreement is the best way to avoid disputes.

Copyright 2010 LexisNexis, a division of Reed Elsevier Inc.