Understanding Contingency Clauses in Home Sale Agreements: A Seller’s Perspective in California

When selling a home in California, sellers often wonder about the possibilities of canceling or backing out of a purchase sale agreement without facing penalties or legal action from the buyer. This article delves into the specific contingency clauses that may allow a seller to do so, with a focus on California real estate laws.

What Are Contingency Clauses?

In the context of real estate transactions, contingency clauses act as conditions that must be met before a sale is finalized. These clauses can cover various scenarios, such as financing, inspections, and appraisals, giving both buyers and sellers important protections. However, the seller’s ability to cancel or back out of a contract without penalties or legal repercussions largely depends on the specific terms and conditions outlined in the purchase and sale agreement.

The Buyer’s Failure to Meet Deadlines

One common contingency clause that allows a seller to cancel or back out of the contract is the failure of the buyer to meet specified deadlines. For instance, if the buyer fails to provide financing approval by a specified date, this could potentially trigger the seller’s right to cancel the agreement.

For example, if a buyer is required to provide financing approval by a certain date and fails to do so, this might terminate the agreement. The purchaser and seller will have to refer to their specific purchase and sale agreement (PSA) to understand the exact terms and conditions.

California Association of Realtors Purchase Agreement (CALCRA)

Regarding the California Association of Realtors (C.A.R.) purchase agreement, a seller has a limited number of contingencies that can be used to cancel the contract. Typically, the Agreement provides that in the event that the buyer defaults on the contract, the seller must give the buyer a 'Notice to Perform' which extends the agreement for an additional two days.

An example scenario involves earnest money. If the earnest money is due on the 3rd day and is not received, the seller could issue a Notice to Perform and then cancel the agreement on the 5th day without any penalties. This is a specific condition that would only apply if the buyer fails to meet their obligations as outlined in the contract.

General Categories of Contingencies

Other general categories of contingencies most commonly involve investigations, typically concluding within 10 business days after contract ratification; appraisals, usually within 17 days; and loan approval, usually within 21 days. These deadlines vary based on negotiations between the seller and the buyer. If the buyer misses any of these deadlines, the seller cannot unilaterally cancel the agreement; they must follow a specific procedure as outlined in the agreement.

Special Stipulations for Seller Cancellation

To allow a seller to cancel a contract without any penalty or legal action, a special stipulation must be explicitly written into the agreement. One such stipulation might read: 'the seller can cancel the agreement for any reason by notifying the buyer and returning all monies deposited' or 'the sale is subject to the seller finding a suitable house and closing on it by a specified date.' However, these clauses are highly unlikely to be agreed upon by a buyer.

A buyer invests a significant amount of money in various inspections and other expenses associated with obtaining a loan. Therefore, it is unreasonable and impractical to expect a buyer to commit knowing that the seller could cancel the agreement at any moment up to and including closing.

Conclusion

While sellers may wish to have contingency clauses allowing them to cancel or back out of a home sale agreement for various reasons, such clauses are typically not standard in pre-printed purchase and sale agreements. They must be specially negotiated and agreed upon by both parties, which is highly improbable. As such, the only reliable way for a seller to ensure they can cancel a contract under certain circumstances is to include specific and detailed stipulations that are clearly understood and agreed upon by both the buyer and seller.