Contingent Transactions Overview

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Questions and Answers

A contingency must be met for a purchase agreement to be enforceable.

True

The buyer is usually at a disadvantage when it comes to contingencies in a transaction.

False

If a contingency is not met, the benefiting party may choose to terminate the agreement without penalty.

True

Every contingency clause must include a clear statement of the condition to be met as part of its essential elements.

True Signup and view all the answers

Pre-printed forms are discouraged when drafting a contingency clause for a purchase agreement.

False Signup and view all the answers

What is the primary purpose of a contingency clause in a purchase agreement?

To ensure that a specific condition is fulfilled before the agreement can proceed. Signup and view all the answers

What is a common obligation of the party benefiting from a contingency?

To make a good faith effort to fulfill the contingency. Signup and view all the answers

Which element is NOT typically included in a contingency clause?

A detailed financial history of the buyer. Signup and view all the answers

What is a financing contingency typically associated with?

The buyer's ability to withdraw from the contract if financing fails. Signup and view all the answers

Which option best describes the use of pre-printed forms in establishing contingencies?

They can help ensure clarity and compliance with legal requirements. Signup and view all the answers

Match the following aspects of contingencies with their descriptions:

Termination = Ending the agreement if the contingency is not met Good faith effort = Implied obligation to fulfill the contingency Deadline = Timeframe to meet or remove the condition Notice of satisfaction = Procedure for informing parties that a condition has been met Signup and view all the answers

Match the types of contingencies with their corresponding examples:

Financing contingency = Loan approval needed to proceed Inspection contingency = Property must pass inspection Sale of buyer's home contingency = Current home must sell before purchase Purchase of replacement property contingency = Buyer needs to find another property first Signup and view all the answers

Match the essential elements of a contingency clause with their definitions:

Clear statement = Specific condition that must be met Rights of parties = Entitlements if the condition is not fulfilled Procedure for notice = Steps to inform parties about the condition's status Condition deadline = Time limit for meeting or eliminating the condition Signup and view all the answers

Match the contingent transaction actions with their effects:

Terminate agreement = Void the contract without penalties Remove condition = Continue with the contract despite the unmet contingency Refund deposit = Return of money to the buyer if the contingency fails Proceed without contingency = Continue with the contract if the condition is not fulfilled Signup and view all the answers

Match the forms of contingency-related notices with their purposes:

Notice to perform = Alert parties to fulfill the contingency Cancellation notice = Inform about termination of the purchase agreement Satisfaction notice = Confirm that the condition has been met Removal notice = Notify about the elimination of the condition from the contract Signup and view all the answers

Study Notes

Contingent Transactions

Contingency: A specified action or event, a condition for a sale. It must occur for the agreement to be enforceable. If not met, the agreement can be terminated, and the buyer usually gets their deposit back. The contingency must be clearly defined, with clear instructions on how to fulfill it, notice procedures, deadlines, and rights if unmet. Use pre-printed, attorney-approved forms. Forms may include contingency clauses within the standard form or as addendums.
Termination/Removal: Contingencies can benefit either the buyer or seller, usually the buyer. The benefiting party can terminate the agreement without penalty or remove the condition and continue the sale. There's an implied obligation to make a good-faith effort. If not, the contingency is dropped and the parties proceed without it.
Essential Elements of a Contingency Clause: Clear condition, how to fulfill it, notice procedure, deadline, and rights of parties if the condition isn't met. Use pre-printed, attorney-approved forms. Forms may have contingency clauses within the standard form or as addendums.
Financing Contingencies: These release the buyer from the agreement if they can't secure financing, a common part of purchase agreements. Financing terms can be general or specific. The seller can terminate the agreement if the buyer doesn't notify them of fulfilled financing by the deadline, after providing notice. A financing contingency often includes an appraisal contingency. If the appraised value is lower, the buyer can cancel, and get their deposit back. Lenders often require repairs made by the seller, which are often included in the contingency.
Inspection Contingencies: Purchase agreements are often contingent on inspections (home, pest control, geological, hazardous materials, etc). These contingencies specify responsibilities for ordering and paying inspections, review deadlines, and the opportunity to reinspect if repairs are needed. The buyer should present a written list of problems with inspection reports to request repairs. The seller may need to correct code violations, even if a sale doesn't happen.
Sale of Buyer's Home Contingency: The buyer needs to sell their current home to fund the new purchase. This should be explicit in the agreement to avoid disputes. Standard forms try to prevent hidden contingencies on this. The contingency can be based on acceptance of an offer or closing date on their old home. A swing loan might be involved. A release clause lets the seller proceed with other offers if the buyer's contingency isn't met. Either party may prefer earlier or later contingency dates.
Purchase of Replacement Property Contingency: Less common than others. The seller is looking to find a new home themselves before selling their existing one.
Other Contingencies: Agents should consult their broker and attorney in unusual cases. Contingencies can be requested by either party.

Unfulfilled Contingencies

Notice to Perform: A buyer who fails to meet a deadline frequently needs to give written notice of removal of a contingency or termination to the other party. The seller must give the buyer a Notice to Perform before terminating. This allows a final chance to remove the contingency.
Cancellation Agreement: This is essential to clearly record the termination of the contract when contingencies are not met, resolving disputes on the deposit. The cancellation agreement formalizes the termination if the transaction doesn't close.

Exercises Summary

Exercise 8.1: Reviews the previous chapter (Purchase Agreements) in the form of true/false questions.
Exercise 8.2: Analyzes scenarios where inspection results lead to problems, guiding students through potential options for both buyer and seller, using a Request for Repair form to document negotiation and actions.
Exercise 8.3: Aligns pre-printed forms (listing agreement, purchase agreement, contract for deed, etc.) to relevant situations, focusing on selecting the appropriate form for contingencies (and how to correctly use those forms).

Chapter 8 Quiz

The quiz covers various types of contingencies (financing, inspections, sale of buyer's home), their elements, who benefits, common issues (like missing deadlines), and the consequences of not meeting the stipulations of a contingency. The quiz highlights buyer priorities in a contingent sale. It also covers how to avoid hidden contingencies, how sellers use release clauses, and who is responsible for what in case of unfulfilled contingencies.

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Description

This quiz covers contingent transactions, focusing on the essential elements of a contingency clause and the roles of buyers and sellers. It emphasizes the significance of clear conditions, termination rights, and financing contingencies in real estate transactions. Understand how these elements shape enforceable agreements in property sales.