Understanding Contractual Contingencies in Real Estate Transactions

In the real estate market, buyers may have more leverage, which increases their chances of getting an offer accepted with contractual contingencies remaining intact. But what exactly are contingencies, and how do they affect real estate transactions? This article will explore the standard contingencies in the California Residential Purchase Agreement and Joint Escrow Instructions (C.A.R. Form RPA) and provide helpful tips for buyers and sellers.

Standard Contract Contingencies

The C.A.R. Form RPA includes at least five and as many as seven standard contingencies in the contract. These contingencies are:

• Loan

• Appraisal

• Investigation of Property

• Review of Seller Documents

• Preliminary (“Title”) Report

• Common Interest Disclosures – If applicable

• Review of Leased or Leaned Items – If applicable

It is important to note that the deadline for removal of each of these contingencies is 17 Days after Acceptance. However, for the contingencies that involve the buyer receiving documents to review, the deadline for removal is 17 Days after Acceptance or 5 Days after Delivery of the relevant documents, whichever is later.

Continuation of Contingency – Active Removal Requirement

It is crucial to remember that contingencies in the RPA do not go away automatically. The RPA requires active removal of contingencies. Even after the deadline specified in the contract, the buyer retains the right to cancel based on the good faith exercise of any contingency that has not yet been removed in writing. If the seller wants to enforce the deadline, they may send a Notice to Buyer to Perform, and then cancel the contract if the buyer still does not remove the contingencies.

Good Faith Exercise of Contingencies

Contingencies must be exercised in good faith, which means that the reason for canceling must be tied to whichever contingency the buyer is citing as the basis for their cancellation. Paragraph 8 of the RPA goes into more detail regarding what issues are covered by each of the contractual contingencies. Buyers should remember that simply having any contingency in place is not a “get out of jail free” card that allows them to cancel and get their deposit back no matter what.

Deposit Issues

Canceling is a two-step process, and canceling escrow and having the deposit released to either party will always require mutually signed escrow instructions, or potentially a judicial decision or binding arbitration award. Paragraph 14H of the RPA outlines how deposits will be handled at the time of a cancellation. It is important to note that neither agents nor escrow holders can advise as to what constitutes acting in good faith, and both buyers and sellers should consult with their own attorneys regarding deposit issues.

Conclusion

In conclusion, understanding contractual contingencies is vital for both buyers and sellers in real estate transactions. Buyers should exercise contingencies in good faith, while sellers should be aware that contingencies do not go away automatically and that active removal is required. Both parties should also be mindful of the deposit issues that arise with cancellations and seek legal advice when necessary. By following these guidelines, buyers and sellers can navigate real estate transactions with confidence.

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