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It's The Law Be Careful With Contract Contingencies

Question: I received an offer to purchase my house, but the offer has a lot of contingencies. The contingencies include sale of the buyer's home, financing and inspections. I am concerned that the buyer will use the contingencies as an excuse to back out of the contract. Please explain how contract contingencies work.

Answer: Most real estate purchase contracts have contingencies. Contingencies are most often intended to protect a buyer. If the contingency is not met or waived, the buyer may terminate the transaction and usually obtain refund of any deposit.

It is important that both seller and buyer fully understand the effect of all contingencies. Some create a complete option for the buyer to walk away. Others may depend on action by a third party.

Financing contingencies may be the most common. They generally provide that the buyer need not close unless the buyer can obtain mortgage financing. The exact language can be important, as these contingencies often specify the type of loan, interest rate, term and time within which the loan must be obtained to meet the contingency.

Some financing contingencies require the buyer obtain a loan commitment. Buyers rarely obtain unconditional loan commitments, so there can be some argument over whether a conditional commitment meets the contingency. Our local contract form has a contingency for a buyer obtaining "loan approval." However, the buyer can only terminate the contract under the contingency if actually declined for the loan and receives an Equal Credit Opportunity Act statement of adverse credit action. That is far different from the understanding of many buyers, who believe that if they do not get a loan within the time provided in the contract they can terminate and get their deposit back.

Under Florida case law, a buyer only has to apply for a loan with one lender. If the buyer does not obtain the loan specified in the contract contingency, the buyer can terminate the contract even if the buyer could have obtained the loan from another lender or the seller agrees to finance on the same terms. In other states, buyers may have to apply to multiple lenders to show good faith.

Inspection contingencies are also common. Some allow the buyer to inspect the property and terminate the contract with refund of deposit if the buyer determines the property is unsuitable. That is really an option contract for the buyer. Others require inspection by licensed or otherwise qualified inspectors, and mandate that the seller fix any defects up to a certain dollar limit. Our local contract form provides that the buyer may inspect the property and if any inspection turns up a defective item the buyer may request the seller to repair the item or provide a monetary credit at closing. If the seller refuses, the buyer may terminate the contract and get the deposit, or accept the defect and close.

Recently, we have seen an increase in contracts contingent on the property appraising at no less than purchase price. Even those contingencies can be contentious.

In the recent case of Gibney v. Pillifant, Gibney contracted to buy a house from Pillifant. Purchase price was $620,000.00. To protect them from a drop in property values, the Gibneys insisted that the contract include the following language "contingent upon this property appraising for no less than $620,000.00 to be conducted by a local appraiser."

Before closing, the Gibneys obtained a $560,000.00 appraisal. The Pillifants thought that appraisal was low and obtained a $635,000.00 appraisal to prove it. The Gibneys still refused to close, terminated the contract and demanded refund of deposit.

At trial, the Pillifants argued that the Gibneys drafted the contingency and it should be construed against them. Since the Pillifants got an appraisal that met the contingency, they argued the Gibneys should close. The Gibneys argued that they could terminate the contract if any appraisal was less than $620,000.00. The trial court agreed with the Pillifants and awarded the deposit to them. The Gibneys appealed.

The appellate court reversed the trial judge and ruled for the Gibneys. The court explained that the Pillifants did not reserve a right to a competing appraisal nor did they provide in the contract that any such appraisal would be controlling. Since the Gibneys' appraisal was less than $620,000.00, the contingency triggering an obligation to close did not occur and the Gibneys were entitled to refund of their deposit.

Contract contingencies are common. Minor changes in language can be significant. Case law and court rulings with respect to contingencies can also affect performance requirements. This is one area where obtaining an experienced attorney will prove invaluable.

By: William G. Morris, Esquire

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