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What is a Contingency?

What is a Contingency?

A Contingency is a provision in the contract that makes one party’s obligation to perform dependent upon to occurrence of specific events. Most purchase agreements are conditional, or contingent.

In a Residential Purchase Agreement, the buyers are protected from not losing the earnest money deposit by certain contingencies: disclosures, home inspection, appraisal, loan, and sale or purchase of other property contingencies. For example, if the buyers are not able to obtain a loan, they can withdraw from the contract without forfeiting the deposit.

All of the contingencies are clearly stated in the purchase agreement. All parties should be informed how long the contingency period will be and what are their rights in case the contingency isn’t fulfilled or waived.

If the specified event occurs, then both buyer and seller are bound to carry out the terms of the contract. If the specified event doesn’t occur, the buyer has the right to terminate the contract and to receive the good faith deposit.

Is important to understand that only the benefiting party has the right to choose between terminating the contract or removing the contingency. Contingencies in the Purchase Agreement are usually for the benefit of the buyer who’s protected to go through with the contract if something doesn’t work out in their situation or if the property is not up to their desires.


These are the basic elements of a contingency clause:

(1) clear terms of the contingency and what needs to be done to fulfill it

(2) procedure for notifying the other party

(3) the length of the contingency

(4) each party’s rights in case the contingency is met or not.

If a contingency is not fulfilled, the Seller will send a Notice to Perform to the buyer giving the option to waive the contingency in 72 hours.

When the buyers waive the contingency within 72 hours, the contract stands. If the buyer can not, then the seller can cancel the Purchase agreement. In this case, the buyer and seller sign a cancellation agreement.

Source: California Real Estate Practice



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