Real estate transactions in California are governed by a complex framework of statutory law, case law, and standardized contractual forms. Among the most critical components of these transactions are contingency clauses, which serve as legal safeguards for both buyers and sellers. This guide provides a comprehensive overview of contingencies in California Association of Realtors (C.A.R.) property contracts, with pinpoint citations to relevant statutes and case law.
I. What Are Contingencies in Real Estate Contracts?
A contingency is a contractual condition that must be satisfied before a real estate transaction can proceed to closing. These clauses allow parties to cancel or renegotiate the agreement if specific conditions are unmet, thereby mitigating risk.
Under California Civil Code § 1436, “[a] condition in a contract is an event which must occur before performance under the contract becomes due.” Read the statute here.
II. Common Contingencies in C.A.R. Contracts
The Residential Purchase Agreement (Form RPA-CA) published by the California Association of Realtors includes several standard contingencies:
1. Inspection Contingency
Allows buyers to conduct inspections and cancel or renegotiate based on findings. Buyers may inspect for structural issues, pests, mold, and other defects. See Beverly Way Associates v. Barham (1990) 226 Cal.App.3d 49, 55.
2. Appraisal Contingency
Protects buyers if the property appraises below the agreed purchase price. If the appraisal is insufficient, buyers may cancel or renegotiate.
3. Loan (Financing) Contingency
Permits buyers to cancel if they fail to secure financing. This is critical in competitive markets where pre-approval does not guarantee final loan approval.
4. Title Contingency
Ensures the seller can deliver clear title. Buyers may cancel if title issues arise, such as liens or encumbrances.
5. Sale of Buyer’s Property Contingency
Makes the purchase dependent on the buyer selling their current home.
6. HOA Document Review Contingency
Allows buyers to review homeowners association documents and cancel if they find unfavorable terms.
7. Insurance Contingency
Lets buyers cancel if they cannot obtain satisfactory homeowners insurance.
Each contingency typically includes a contingency period, often 17 days, during which the buyer must act. Failure to remove contingencies in writing may result in cancellation by the seller
III. Legal Requirements for Contingency Removal
Contingencies must be formally removed in writing. Simply allowing the deadline to pass does not constitute removal. Sellers may issue a Notice to Perform, giving buyers 48 hours to act. If buyers fail to comply, sellers may cancel the contract
IV. Case Law Interpreting Contingency Clauses
Mattei v. Hopper (1958) 51 Cal.2d 119
The California Supreme Court upheld a contract with a satisfaction clause, ruling that the buyer’s obligation was not illusory because it was subject to a standard of good faith.
Bleecher v. Conte (1981) 29 Cal.3d 345
The Court enforced a land sale agreement where the buyer’s obligations were contingent on approval of reports, but such approval could not be unreasonably withheld. The Court emphasized the implied covenant of good faith and fair dealing and rejected arguments that the contract lacked mutuality
V. Federal Statutes Impacting Real Estate Contingencies
While contingencies are primarily governed by state law, certain federal statutes influence real estate transactions:
- Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. §§ 2601–2617: Requires disclosures about settlement costs and prohibits kickbacks.
- Truth in Lending Act (TILA), 15 U.S.C. §§ 1601–1667f: Mandates clear disclosure of loan terms, which can affect financing contingencies 3.
VI. Risks and Best Practices
Risks of Waiving Contingencies
Waiving contingencies prematurely can expose buyers to significant financial risk. For example, if a buyer waives the appraisal contingency and the property appraises low, they may have to cover the difference in cash or risk losing their deposit.
Best Practices
- Consult legal counsel before removing any contingency.
- Document all inspections and approvals.
- Negotiate clear language in contingency clauses to avoid ambiguity.
- Monitor deadlines closely and act promptly.
VII. Conclusion
Contingencies are not mere formalities—they are essential legal tools that protect parties in California real estate transactions. Buyers and sellers should understand their rights and obligations under these clauses and seek legal guidance when necessary. Properly managed, contingencies can facilitate a smooth and secure transaction.
For personalized legal advice or assistance with drafting or reviewing contingency clauses, contact our office today.