Question: I know that real estate contracts have contingencies. What does that mean?
Answer: Black’s Law Dictionary helpfully defines a contingency as “an event that may or may not happen, a doubtful or uncertain future event.”
As Texas realtors, we are trained in the use of promulgated forms – i.e. forms approved and required in all situations that they fit – based on those drawn up by the Texas Real Estate Commission. Those contract forms try to address many contingencies that may arise in a real estate transaction in Texas.
This is tedious stuff, but important. Let’s step through some of the contingencies mentioned in the contract forms that we would typically help clients use in a River Oaks residential real estate transaction. (Note: if you want to know about your legal rights under a real estate contract, consult a real estate attorney. This article is not intended as legal advice).
In our day-to-day practice we most typically use the following contract forms on behalf of our clients:
- 1 to 4 Family Residential Contract (Resale)
- Third Party Financing Addendum for Credit Approval
- Environmental Assessment, Threatened or Endangered Species, and Wetlands Addendum
- Addendum for Property Subject to Mandatory Membership in a Property Owners Association
Don’t let this list of four forms fool you: There’s a blizzard of other paperwork required in a real estate transaction. But these are the basics for selling a house in River Oaks. These forms try to address many of the contingencies that might occur. Contingencies are important to both buyer and seller.
Here, we will list the contingencies in the order they appear in the contract forms. (Listing them alphabetically would be confusing.)
1 to 4 Family Residential Contract (Resale)
- Earnest money: “If Buyer fails to deliver the earnest money within the time required, Seller may terminate this contract or exercise Seller’s remedies under Paragraph 15, or both.” (More about Paragraph 15 below.)
- Title commitment: “If the Commitment and Exception Documents are not delivered to Buyer within the specified time …” a list of remedies is provided by the contract language.
- Survey: There are several possibilities, including:
- “If Seller fails to furnish the existing survey …”
- “If the existing survey or affidavit is not acceptable to Title Company or Buyer’s lender …”
- Objections: Buyer’s objections to items on the survey or disclosed in the title commitment are provided with a list of specific remedies in the Title Policy and Survey paragraph of the contract.
- Membership in a property owners association: “If the Property is subject to mandatory membership in a property owners association …” the contract encourages the use of a specific addendum (see below) and notifies the buyer of some of the implications.
- Repairs: If required repairs are not agreed to, or not completed as agreed, the contract provides for remedies.
- Leases: “If the Property is subject to a residential lease …” the contract provides procedures for dealing with the lease.
- Property tax proration: “If taxes for the current year vary from the amount prorated at closing, the parties shall adjust the prorations when tax statements for the current year are available.”
- Casualty loss: “If any part of the Property is damaged or destroyed by fire or other casualty …” the contract provides ways in which to solve that problem.
- Default: Paragraph 15 of the contract explains remedies if either buyer or seller defaults.
- Earnest money release if no closing occurs: The contract suggests mechanisms for the release of remaining earnest money to the buyer or the seller.
- Federal tax requirements when the seller is a “foreign person”: There are strict procedures for dealing with this situation prescribed by federal law.
- Option fee: If the termination option is not exercised by the buyer, the contract provides choices about who receives the option fee.
Third Party Financing Addendum for Credit Approval
There are two main contingencies in this contract form:
- Credit approval of buyer: “If Buyer cannot obtain Buyer Approval …”
- Property approval by lender: “If Buyer’s lender determines that the Property does not satisfy lender’s underwriting requirements …”
In each case the contract form states the procedures for those contingencies.
Environmental Assessment, Threatened or Endangered Species, and Wetlands Addendum
This is a head-scratcher for many buyers and sellers. Nevertheless, one must presume that there is some merit behind it, as so many brokerages require it to be included.
- “Buyer may terminate the contract by furnishing Seller a copy of any report noted above that adversely affects the use of the Property …”
Addendum for Property Subject to Mandatory Membership in a Property Owners Association
- “Buyer may terminate the contract within 3 days after Buyer receives the Subdivision Information …”, with the intent of protecting the buyer if there are any surprises.
All this is pretty dry stuff, you may think. But things become awfully interesting when one or more of those contingencies arise.
Please note that there are other contingencies in a real estate transaction not described here, both stated in the contract forms and implied. For more information about these please consult a real estate attorney.