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Purchase Contract Contingencies

The conditions in a home-purchase agreement that let a buyer walk away with the deposit - inspection, financing, appraisal, sale of the buyer's current home, title - how each is exercised and waived, and what happens to the earnest money when the deal fails.

Informational only - this is not legal advice. These definitions explain general legal vocabulary in plain English. They are not advice about your situation, reading them creates no attorney-client relationship, and the law differs from state to state and changes over time. For advice you can rely on, speak to a lawyer licensed in your state.

What it means

A residential purchase agreement is a binding contract from the moment both parties sign it, and a buyer who backs out without a contractual basis forfeits the earnest-money deposit and may be liable for more. Contingencies are the exits the contract builds in: each is a condition that must be satisfied, or waived by the buyer, by a stated deadline, and if it is not the buyer may terminate and recover the deposit. The inspection contingency allows the buyer a period to have the property examined and then to terminate, or to request repairs or a credit; the financing contingency allows termination if the buyer, having applied in good faith, cannot obtain a loan on the stated terms; the appraisal contingency allows termination or renegotiation if the lender's appraisal comes in below the price; a title contingency lets the buyer object to defects the title commitment reveals; and a sale contingency makes the purchase depend on the buyer selling their current home.

The deadlines are the mechanism. In most standard forms a contingency that is not exercised by its deadline is deemed waived, and the buyer proceeds to closing bound or loses the deposit. In others the buyer must affirmatively remove each contingency in writing and the seller may cancel if they do not. Which regime applies, whether notice must be in writing and how it is delivered are all in the form, which is why the printed contract matters more than the negotiation that preceded it. A seller in a competitive market may accept an offer with fewer contingencies over a higher price with more, and a buyer who waives the inspection or appraisal contingency to win a bidding war has taken on the risk those conditions existed to shift.

When a sale fails, the earnest money is held by the escrow or title company, the broker or a lawyer, and is released only on the parties' joint instruction or a court order. A seller who believes the buyer defaulted may refuse to sign the release, and many forms provide for mediation, liquidated damages capped at the deposit, or both. A seller who defaults - by refusing to close or by selling to someone else - may be ordered to convey the property, because land is treated as unique and specific performance is the traditional remedy.

Where this comes from

Purchase contracts and their remedies are state contract and property law; the forms in common use are promulgated by state Realtor associations, state real-estate commissions (Texas, for instance, mandates its commission's forms) or bar associations, and each defines its own contingency mechanics and deadlines. Specific performance as the buyer's remedy for a seller's breach is the rule of the common law and of Restatement (Second) of Contracts § 360; liquidated-damages clauses are tested under § 356 and the state's own rule. The federal Truth in Lending Act and RESPA govern the loan process behind the financing contingency but not the contract itself. No deadline in any form is stated here.

When people hire a lawyer for this

In the states where lawyers routinely handle residential closings, the attorney-review period is the moment to add or fix contingencies; elsewhere a buyer who wants a lawyer must ask for one before signing, because the standard form is the seller's and the broker's document. The dispute worth a lawyer is nearly always the deposit: a buyer whose termination notice was late, informal or on the wrong ground, or a seller sitting on a deposit the buyer says was earned back, should get advice before signing any release or mediation agreement.

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Part of the LawyerLand plain-English legal glossary. Definitions are written from primary sources - statutes and court rules - and each entry states the authority it rests on, or says plainly when the doctrine is state law with no national rule.

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