Bay Area Real Estate Lawyer on Real Estate Contingencies

As a real estate lawyer in the Bay Area, a question I get from a lot of clients is how contingencies work in real estate contracts.  These are important terms of any purchase agreement, so it’s essential that they be understood.

The basic idea of a contingency is simple: it is a condition or reason that allows one party (usually the buyer) to terminate the contract without penalty.  Typical examples of contingencies in a residential purchase would be:

  • Financing—the buyer does not have to buy if they can’t get a loan on specified terms
  • Condition of Title—the buyer does not have to buy if title to the property is not satisfactory
  • Property Inspections—the buyer does not have to buy if the inspections reveal unsatisfactory conditions

These and other types of contingencies are a balancing act.  They allow a buyer to make an offer to purchase which is firm enough that the seller will proceed, but without having to do all their investigation before making the offer—and leaving open an escape clause if things don’t go according to plan.

An important phase of most purchases is contingency removal.  At some point during the process, the various contingencies will be removed (or “waived”), after which point the buyer may no longer use that particular contingency as a legitimate reason to cancel the contract.

Most real estate purchase contracts will specify the timeline for contingency removal.  For example, a buyer may have a certain number of days after their offer is accepted to remove their financing contingency.  Other contingencies may have different timelines: typically the contingency on approval of any seller disclosures will run a specified number of days from when the disclosures are received.

It’s also important to know that there are two different ways that contingencies are removed, and you need to review your particular contract to know which one applies to you.  These are known as active and passive removal.  As the name implies, active removal requires that the buyer take an active step to remove the contingencies, usually by signing a document acknowledging that it is removed.  Passive removal means that the contingency is removed when the applicable amount of time has passed, unless the buyer takes affirmative steps to object.

When you’re buying a home, putting the proper contingencies in your contract can allow you to start the process promptly (keeping out those other offers), while protecting you from unexpected problems.  Monitoring those contingencies, and removing them when the time is right, allows you to keep the process moving smoothly toward a successful close.

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