Best of the Hotline: a sale and settlement contingency gone awry

By James L. Goldsmith, Esq.

Buyer and Seller negotiated an agreement of sale subject to a Sale and Settlement of Other Property Contingency (With Right to Continue Marketing and Timed Kickout Clause).The agreement was written so that Buyer's inspection period began not at the date of execution, but only when the sale and settlement contingency was "removed."

Shortly after execution of the agreement, Seller got a bite from another buyer. The listing agent, intending to be courteous, notified the agent for Buyer of this interest and of the fact that the property was being shown to the other buyer. Upon learning of the competition, Buyer became distressed thinking that "her home" would be lost to someone else. So, she jumped the gun and began looking for another home to purchase. She did find another home, one she liked even better than the one she had contracted to purchase.

As stated, Buyer jumped the gun, because as it turns out, the other buyer didn't care for the home and never submitted an offer. Buyer, however, was so in love with home two that she determined that she was not going to proceed with the purchase of home one. At about the same time she made this decision, Buyer received a decent offer on her home. Her acceptance of that offer triggered the obligation to present it (names and personal information redacted) to Seller. Assuming that its terms were acceptable to Seller, Seller's right to market the property would end and Buyer's inspection period would commence.

Q. Buyer wants out! She was so smitten with house two that she doesn't want to proceed under the terms of her existing contract with Seller. Can she terminate her contract to buy home one? How does she do so? Does she get her deposit back? Is she liable to Seller for actual damages?

Before reading the answers, you may wish to reread the facts taking note of the mistakes as you see them. Yes, Buyer will have the opportunity to terminate the agreement; though how many hurdles she has to jump will depend upon how Seller reacts. Because the deferred inspection contingency now begins (with receipt of an acceptable offer on her home), Buyer can engage an inspector, review the report, find issues, and terminate within the inspection contingency period. Has there ever been a home inspection that doesn't address at least one issue that "is unsatisfactory to Buyer"? That's all it takes under the Standard Agreement to trigger the Buyer's right to unilaterally terminate the agreement, despite what remediation Seller would offer.

Having the inspection as a pretext to terminate is, however, a waste of time and resources. If the inevitable is termination, it might be better for Seller and Buyer to circumvent the inspection process and mutually agree to terminate. While the Seller won't be any happier, at least the Seller does not have to keep the property off the market during the inspection period, and the Seller won't be burdened with receipt of an inspection report that may lead to additional disclosures. I see no advantage for Seller in not agreeing to terminate other than retribution: at least the Buyer has to spend money and waste time as well!

Seller might also be able to capitalize by agreeing to terminate. In addition to not having the home inspected, Seller might be able to negotiate retention of some of the deposit, which will have to be returned if Buyer terminates on the basis of an inspection. It might be an opportune time to ask for a portion of the Buyer's deposit.

While I think it inevitable that Buyer will work her way out of the original agreement in order to buy home two, I see a number of issues and errors that altered the course of this transaction. Why did the listing agent inform the Buyer agent that he was showing the property to another potential buyer? The sale and settlement contingencies that permit the property to be marketed do not require that sellers inform the buyers of the marketing activity. When the listing agent revealed the competing interest, what was Buyer's reaction? She panicked and looked at other homes, which led to her discovery of home two, her dream home!

Why did the parties agree that the inspection period would commence only after Buyer's home was under agreement or when the sale and settlement contingency was otherwise "removed"? The answer is obvious: why should Buyer spend money on inspections when there is the possibility that Buyer will not have to buy the property. On the other hand, the more a buyer is invested in a property, the less likely a buyer will look elsewhere. Had Buyer undergone the inspection within the initial days of the contract, when she was desirous of purchasing it, she likely would have found no pretext on which to terminate. Generally, I believe sellers can hold their ground and insist that inspections take place up front, even for buyers who purchase on a sale and settlement contingency.

The agent who called in this Hotline question asked about the morality of the buyer using an inspection contingency as a pretext to terminate. I began my answer with, "I am a lawyer, not a clergyman," but I will leave the questions on morality to you.

I have never been a big fan of sale and settlement contingencies. "Come back when you've sold your home" was the mantra of the chair of PAR's Standard Forms Committee 20 years ago and I hear him say it every time I review a call of this nature. These contingencies, however, have their place when used appropriately. Perhaps this scenario will assist you in avoiding this Seller's unfortunate loss.

The question also underscores the ease with which buyers can terminate agreements. There are ways to dissuade buyers from doing so: consider larger deposits, not permitting the deposit to serve as a liquidated damage, and the immediate onset of inspection periods rather than allowing them to be deferred.