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Even if you don’t know it, you’ve probably run into a contingency contract for payment at some point. Most people have heard the term “contingency clause” and know that it means a contract subject to one or more conditions being met.
These kinds of contracts are legal documents used under various circumstances by many different people and organizations.
However, one of the most common places we see them is in real estate. They are used by negotiating parties to identify a condition needing to be met to complete a purchase and sale agreement. Here is more about this type of contract and how you might be able to use a contingency clause in your contracts.
What is a Contingency Contract?
A contingency contract is typically a legal document that sets out a condition needing to be met before the contract can be concluded.
If the condition is not met, the contract will never come into force and would therefore be null and void. So, if either party does not meet the contract's requirements, the other party would be entitled to walk away from the deal. Sometimes, there are also penalties for not meeting the requirements of a contingency contract.
Usually, there is also a time limit on contingency clauses. So, the contingency clause will include a date by which the party required to deliver something must do so.
Sometimes, this kind of contract includes an earnest money contract. For example, this agreement for a future sale requires the buyer to deliver a deposit – or “earnest money” – to prove that they are committed to the deal.
Here is an article about contingency contracts.
Example of a Contingency Contract
One straightforward example might be a child who agrees with their parent that if they get an A in a particular class, they will get a new bicycle. Of course, the contract may be verbal, and it may be between family members. Still, there is a contingency clause that sets out what the child must deliver to trigger the parent's response.
Here is an article that provides examples of different types of contingency contracts.
Contingency Contracts in Real Estate
In real estate, a buyer often wants to put an offer on a home. Still, they have some conditions needing to be met before they are willing to complete the purchase agreement. Some examples of this kind of contingency clause might include:
- A requirement to have a home inspection completed before the sale
- A requirement that the seller completes a specific repair
- A requirement to include some kind of movable property in the deal
There are many reasons why real estate lawyers might include a contingency clause in a contract on behalf of their clients. No matter the reason, however, if the seller does not comply within the stipulated period, the contract will not be concluded, and the sale will fall through.
This is an important way to protect your interests. Still, the effectiveness will depend on what kind of market it is. For example, suppose there is high demand for real estate, and it’s a seller’s market. In that case, they might choose to take another offer that does not include a contingency clause. So you need to gauge your chances of success.
Here is an article that describes how contingency contracts are used in the purchase and sale of real estate.
Image via Pexels by Tirachard Kumtanom
What’s Included in a Contingency Contract?
A contingency contract is usually a legal document (notwithstanding verbal agreements like we described above), which means certain things need to be included, which are usually:
- The names and contact information of both negotiating parties
- The subject of the contract – what the negotiating parties are trying to agree on
- The conditions or contingency clause upon which the agreement depends
- A time limit during which the seller or service provider must agree to the condition before the offer expires
Once agreed, to be a binding legal document, a contingency contract should be signed by both parties, including the date and place of a signature. Usually, there need to be witnesses to the signing.
All parties who sign a legal document like this do need to be of the legal age of majority in the place they live and where the contract is signed.
Here is an article outlining some of the clauses usually included in real estate contingency contracts.
When Would You Use a Contingency Contract?
Contingency contracts usually come into play when one of the parties does not believe that the other will deliver what they are promising.
So, for instance, someone who is selling something that will be paid at some point in the future might require the buyer to provide earnest money as a condition needing to be met for the sale. Usually, these contracts would also include a contingency clause that if the buyer reneges on the deal, the money already paid would be forfeit. Again, this would give the buyer an incentive to complete the deal and give the seller the financial means to find a new buyer if they don’t.
Another example might be if someone wants to buy a used car but is not sure that the vehicle is in the condition the seller claims it is in. They might make the purchase and sale agreement contingent on a mechanical inspection by a garage of their choice.
In both of these cases, one of the parties is not sure that the other will deliver, so they create a situation where they are protected regardless.
Here is an article that discusses when you might want to use a contingency contract.
Contingency Contract Negotiation
A contingency contract is a legal document that is usually a fallback. The parties cannot agree to a contract without a contingency clause, so they create a contract that allows them to work around their concerns.
In most cases, where both parties are genuine and have provided all the relevant information to the deal, a contingency clause does not matter. The buyer will get what they want, and the seller will get the deal they need. This kind of contract is a win-win, provided all parties have the right intentions.
Contingency contract negotiations can become tricky, however. Both parties want to conclude the deal but want to protect their interests. Sometimes, they need to hire a real estate lawyer to draft an agreement. There might be some back, and forth once the document is completed.
This means that contingency contracts are usually not a simple solution – but they can ensure that everybody wins.
Here is an article that describes how you can negotiate a contingency contract in business.
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