Contract for the Purchase or Sale of a Home

Yes and no. Similar to many types of contracts, a contract for the purchase or sale of a home becomes binding when both the buyer and seller have signed the agreement.

However, the majority of sales contracts for homes contain contingency clauses, which outline certain conditions that must be met to complete the sale of the home. If any of the conditions provided in the contingency clauses are not met, then the parties may back out of the contract without fear of facing any legal ramifications.

What Are Contingency Clauses?

Contingency clauses set forth certain conditions to be met before the buyer and seller can officially complete the final sale transaction. If the conditions described in the contingency clause are not met, then the contract will become null and void. It will also allow a party (usually the buyer) to back out of the agreement without legal consequences.

There are several different types of contingency clauses that can be found in contracts for the purchase or sale of a home. The parties are always free to draft their own conditions. However, there are several frequently used contingency clauses, and since they are so common, the parties should consider whether one or more of them fits their situation. These frequently used contingency clauses include the following:

1. “Subject to inspection” clause (sometimes referred to as an “appraisal” contingency): With this clause, the buyer retains the right to change their offering price without fear of facing legal consequences if they are not satisfied with the results of a professional inspection of the home.
   • For example, if the seller claims there is no water damage or black mold and a professional inspection report concludes otherwise, then the buyer can change the terms of the deal or negotiate with the seller for a better price.
2. “Encumbrance free” clause: The parties may also contract to include a clause that requires the title to be lien-free. If the buyer discovers that the title is not lien-free and the seller does not cure this issue by the time of the closing date, then the buyer will not need to go through with purchasing the home.
3. “Insurability” clause: Another type of contingency clause provides that the home must be proven to be insurable (homeowner’s insurance) before the sale can be finalized. The lender may require this condition. If the buyer tries to get homeowner’s insurance but is not able to do so before the closing, then the buyer has the option to back out of the deal.
4. “Specific repairs or changes” clause: The buyer and seller may include a clause that states the sale of the home is contingent on the seller making specific repairs or changes. For example, if the buyer says they will only purchase the home if the seller fixes the roof first and the seller agrees to make the necessary repairs, and then the seller fails to fix the roof before closing, the buyer will not be required to buy the house.
5. “Subject to financing” clause: In the sales contract, the buyer states the mortgage terms and the maximum interest rate they are willing to pay. If the buyer cannot secure a home loan that meets these conditions, then the buyer may legally walk away from the sale.
6. “Subject to sale of home” clause: If a buyer is having trouble selling their current home for the asking price, and if the parties agree to this contingency, the buyer will be allowed to back out of purchasing the new home if they cannot sell it at or above a certain price by a fixed date
7. “Kick-out contingency” clause: To combat the effects of a “subject to sale of home” clause, a seller may use a “kick-out contingency” clause as a way to be protected if it appears the buyer won’t be able to sell their home in time. This clause provides that while the buyer is trying to sell their current home, the seller can keep the home on the market and can back out of the deal if they find a more qualified buyer.

What if the Contingencies Are Satisfied, But the Buyer Still Backs Out of the Sale?

A buyer who backs out of the sale of a home after all of the contingencies have been satisfied may face many serious consequences. At the very least, the buyer will lose the deposit they placed on the home.

How will breach of contract damages be awarded?

• If the sales agreement contains a liquidated damages clause (this is a stipulation of how much damages the buyer will owe if they breach the contract), then the buyer will have to pay those damages.
• If there is no liquidated damages clause, the seller must attempt to sell the house to someone else. If the seller ends up having to sell the home at a lower price, then the buyer will have to make up the difference and may potentially have to pay extra monetary damages, such as attorneys’ fees.
• If the seller cannot find another buyer to purchase the home, then the seller can sue the buyer for specific performance and force them to purchase the home whether they want to or not.

What if the Contingencies Are Satisfied, But The Seller Backs Out of the Sale?

If a seller backs out of the sale after all of the contingencies have been satisfied, then the buyer can sue the seller for specific performance. Specific performance means that the party must complete their contractual responsibilities whether they want to or not. If the buyer prevails in the lawsuit, then the buyer can force the seller to give them the deed to the home.

A benefit that a buyer receives when they file a lawsuit for specific performance is that while the case is pending, the county will typically record the existence of the lawsuit against the title of the home. This will prevent the seller from selling the home to a different buyer.

In addition, if the buyer can prove that the seller committed intentional fraud in some aspect of the deal, then the buyer may be able to sue the seller for punitive damages. Punitive damage awards are often quite large, as they are meant to inflict punishment on the defendant. The richer the defendant, the more money it will take to punish them.

Do You Need a Lawyer?

Arranging for the purchase or sale of a home can be very complicated. When drafting the various contracts and other documents, many factors must be considered and various legal requirements that must be met. If you wish to enter into a transaction to buy or sell a home, it may be in your best interest to hire a local contract attorney as soon as possible.

An experienced local real estate attorney can make sure that your sales agreement is valid under state law. Your attorney can also ensure that any contracts related to the deal are valid and legally enforceable (e.g., listing agreements with brokers).

In addition, if you need to back out of your agreement, your attorney can also determine whether you might face any legal consequences for your actions and can discuss what may happen if you do so. Alternatively, your attorney can also help you pursue remedies if the other party backed out of the agreement after all contingencies were satisfied.
Finally, if you need to file a lawsuit against the other party to recover monetary damages, your attorney will be able to assist you with this process as well.