Home Purchase Contract Contingencies (Explained Simply)

A contingency is a contractual right allowing a party to cancel a contract (without penalty) either before or after any event (i.e., 21-days after signing a contract).

Standard Buyer Contingencies
For example, the standard California Association of Realtors (CAR) home purchase contract contingencies are as follows:

Inspections. 17-days for the buyer to complete any inspections and investigation (i.e., home inspections, reviewing the title report). Only the buyer can cancel if the buyer is not fully satisfied with the result of the buyer’s inspections and investigations.
Appraisal. 17-days for the buyer’s lender to complete an appraisal. Only the buyer can cancel if the appraisal amount is lower than the purchase price.
Loan Approval. 21-days for buyer’s lender to ‘approve’ the loan. Only the buyer can cancel if the lender does not approve the loan (i.e., the lender does not provide a loan commitment letter or other confirmation of final loan approval).

Less Common Contingencies
And here are some contingencies that are less common:

Sale of buyer’s current home. This contingency is usually processed with the CAR form “Contingency for Sale of Buyer’s Property”, which offers several timing options. Sometimes the Seller only has 17-days to find a new home or cancel; but sometimes the seller checks the box that the contingency continues until seller actually closes escrow on the replacement home.
Seller finds a replacement home. This contingency is usually processed with the CAR form “Seller’s Purchase of Replacement Property”, which offers several timing options. Sometimes the Seller only has 17-days to find a new home or cancel; but sometimes the seller checks the box that the contingency continues until seller actually closes escrow on the replacement home.

Counting Calendar Days for Contingencies
On the standard CAR contract, contingency days are counted as “day after”, so here is how to count them properly:

The contract start date is the day of the last signature on the contract (example: Buyer signs the contract on 6/1/18 and Seller signs the contract on 6/2/18, so the contract start date is 6/2/18)
Count “days ‘after” the contract start date (example: contract start date is 6/2/18, so day one is 6/3/18, day two is 6/4/18… day 17 is 6/19/18).
Weekends and holidays are included in the counting. However, if the last day to perform an action (i.e., release a contingency) lands on a weekend or holiday, then the CAR contract automatically moves the date forward to the next business day (i.e., the 21-day loan contingency lands on Saturday 6/23/18, so the buyer’s last day to release the loan contingency is actually Monday 6/25/18).
Regarding time of day, an action can be performed at any time of day, up until 11:59pm (i.e., the buyer’s last day to release the inspection contingency is 6/19/18, so buyer has until 11:59pm on 6/19/18 to email the seller the signed contingency release form).

Release of Contingencies Procedure
Contingencies are typically released in writing with the CAR form “Contingency Removal”. It’s simple — the buyer checks the appropriate boxes for the contingencies being released, and then emails the form to the seller.

Buyer Delay in Releasing Contingencies
It is not uncommon for a buyer to delay in releasing contingencies. On the standard CAR home purchase contract, there is a surprising result though – nothing happens automatically. If the seller wants something to happen, the seller must be proactive according to the following CAR contract rules/steps: First, the seller needs to give the buyer an official “Notice to Perform” document. This begins a 2-day clock in which the buyer either (1) releases the contingency, or (2) the buyer does nothing. In the event the buyer does nothing, then the seller is free to cancel the agreement; but if the seller cancels the agreement then the buyer receives a refund of the buyer’s initial deposit.

Cancellation Pursuant to Contingency
Here is the typical procedure for cancellation pursuant to a contingency (assume the buyer is the one cancelling):
First, the buyer usually calls or emails the seller to advise of the reason they are cancelling (i.e., concerns about the home inspection report findings; second thoughts about the neighborhood). Second (or concurrently with the first step), the buyer emails the seller the official cancellation document – usually this is the CAR form “Cancellation of Contract” (CC). Both parties need to sign the CC form section relating to release of Buyer’s initial deposit before the escrow will actually release the initial deposit back to buyer. If both parties do not sign their agreement to release the deposit, then escrow will simply hold the funds in escrow until the parties resolve the issue by mediation or arbitration/trial.

Legal Note re Liquidated Damages
The only time the buyer pays liquidated damages to the seller is if the Buyer breaches the contract. Cancelling pursuant to a contingency is not a “breach” of contract. Rather, it is the exercise of a contractual right. Therefore, the Buyer is entitled to a refund of the full deposit upon exercise of a contingency. The only exception to this rule is if the purchase contract explicitly states that an initial deposit is nonrefundable regardless of contingencies.

—
Greg Glaser, Attorney at Law
I help home buyers & sellers throughout California
(925) 642-6651 — greg@gregglaser.com
Flat Fee Packages Available (no commission) for Buyers and Sellers Without a Realtor
http://www.GregGlaser.com