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Removal or Waiver of Contingencies in an Offer

by | Jul 13, 2018 | Contracts and Forms

Q:  My Buyers want to write a non-contingent Offer but, if they learn something negative about the Property during escrow, they may not be able to cancel the deal without losing their deposit.  I have seen other agents simply check the box in Paragraph 14C of the C.A.R. Residential Purchase Agreement form (“RPA”) without attaching the Contingency Removal form in the hopes that they will somehow keep their Buyers’ options open.  That method does not seem to me to be very honest.  What steps should I take to protect my clients who want to remove some or all Contingencies in their Offer?  What steps should I take to minimize my own risk with those same clients?

 

A:  There is some confusion about Paragraph 14C as evidenced by the unfortunate way that some real estate licensees are misusing that provision.  Misuse of contract forms can potentially harm the Buyers and both the Selling Agent and Listing Agent.  This Week’s Tip will focus on what is a Contingency and how to best waive or remove Contingencies in an Offer for everyone’s protection.

  1. What is a Contract Contingency?   A contingency in any type of contract is legally defined as a condition or event that “may or may not occur.”  With real estate, the ultimate performance of the Purchase Contract (closing escrow) can be made “subject to” or “contingent upon” the occurrence of a specified condition (e.g., Buyer’s approval of the status of title) or definable events (e.g., lender approval of the Buyer’s loan or the Seller finding “replacement property”).  If the condition or event does not occur, then the holder of the Contingency has the right to exercise the Contingency to terminate the Purchase Contract and get their deposit back.

TIP:  Sellers and Buyers must always act in good faith when removing contingencies or performing any contractual right or obligation.

  1. How to Remove Contingencies in the Offer?  Paragraph 14C was added to the C.A.R. Residential Purchase Agreement (“RPA” dated 12/15) to enable Buyers to remove some or all Contingencies at the time of making their Offer.  This upfront removal of Contingencies is effectively a waiver of some or all of the Buyer’s contractual rights which are designed to protect the Buyer; thus, use of Paragraph 14C should not be undertaken in a cavalier fashion.

Paragraph 14C creates a 2-step process: (1) the box must be checked; and, (2) the C.A.R. Contingency Removal form (“CR”) “must be attached”.   Although the RPA does not state that the CR needs to be filled in and signed, there is an affirmative obligation in Paragraph 14C that the Buyer designate which Contingencies are being removed on the CR form which would necessitate proper completion and signing of that attachment.

TIP:  Neither the SFAR Purchase Agreement nor the PRDS Purchase Contract requires a 2-step methodology to waive Contingencies at the time of making the Offer. 

  1. What is the Legal Effect of Waiving/Removing Contingency Rights in the Offer?  If the Buyer has waived/removed any or all Contingencies in the Offer, then, as is explained in Paragraph 3 of the CR form:

“Buyer shall not be entitled to a return of Buyer’s deposit if Buyer does not close escrow.” 

 

NOTE:  The bottom line is that if Buyers remove/waive a Contingency and, because of something they later learn about the Property that would have been the subject of that Contingency and they no longer want to go forward with the deal, then their deposit is at risk. The only thing that a Selling Agent should do at that point is refer the Buyers to a qualified California real estate attorney. 

Although it is perfectly acceptable for Buyers to waive/remove any or all Contingency rights when making an Offer, Buyers should only agree to do so with full knowledge of the consequences – they must make an “informed decision.”  As fiduciaries, Selling Agents need to be able to prove that the Buyer made informed decisions and thus Selling Agents should follow the best practice tips below:    

 

PRACTICE TIPS FOR SELLING AGENTS: 

  1. Before preparing an Offer, make certain that the Buyers havereviewed(not just signed or received) the Market Conditions Advisory (either the stand-alone version published by C.A.R. or PRDS) or the version included in several local County Disclosures & Disclaimers Advisories (such as Alameda and Sacramento). 
  2. Review the Contingency Removal form with the Buyers and ask the Buyers if they have any concerns about proceeding with the purchase (such as the fair market value being well below the purchase price) without having the ability to safely cancel if their fears are realized.  Warn Buyers that they should not waive or remove Contingencies which relate to their stated concerns. 
  3. Selling Agents should encourage Buyers to choose which boxes they want to check on the Contingency Removal Form (or use a “0” Time Frame on the PRDS form) before they sign the contract documents.
  4. If Buyers are not following the advice of the Selling Agent, that fact needs to be separately documented, preferably in an e-mail that states what was recommended and the choice(s) made by the Buyers.  For example: “I strongly recommend that you not make your Offer non-contingent and that you reconsider the advice that I gave you regarding [specify advice such as retaining the Appraisal Contingency].”
  5. Selling Agents should document that time was spent with the Buyers reviewing everything the Buyers are to sign and not to simply prove that the documents were uploaded into DocuSign.

 

PRACTICE TIPS FOR LISTING AGENTS:

  1. Do not rely on cover letters, written contract summaries or any statements (whether oral or in writing) from Selling Agents as to what is provided in the Offer; most assuredly, do not assume that the information is correct regarding whether there are any Buyer Contingencies. 
  2. Carefully review the entire Offer and review all of the accompanying documents (such as Addenda or the Contingency Removal form) that are referenced in the Offer.  Checking the box in Paragraph 14C does not necessarily mean that it is a “non-contingent Offer.”
  3. If any documents are missing or are inconsistent with what has been detailed by the Selling Agent, notify the Selling Agent immediately before reviewing the Offer with the Seller.  It is best to correct any perceived oversights or mistakes before there is an Accepted Purchase Agreement.  Legally and ethically, the Listing Agent must act in good faith and deal fairly with everyone.
  4. If the Selling Agent does not provide the missing documentation, but the Seller does not want to reject that Buyer, advise the Seller that the Offer should be Countered to effectively deal with the missing documentation so as to avoid any future problems.

 

 DO NOT FORWARD TO CLIENTS.  This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents.  It may not be reproduced or distributed without the express written consent of Broker Risk Management.  The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.