Practically every purchase agreement contains a number of contingencies.
That is, for whichever party - buyer or seller - who has the contingency,
certain conditions have to be met in order for that party to be obligated
to continue with the transaction. Usually it is the buyer who has contingencies,
but sellers can as well. For example, sometimes it is a contingency of a
transaction that the seller must first be able to find a suitable replacement
property.
The most common contingency in a real estate transaction is that the buyer must
be able to obtain financing. If he can't get a loan then he is not obligated to
complete the purchase. Other common contingencies are that the buyer must be
satisfied with respect to both the physical condition of the property and other
matters that may affect its use and enjoyment. Those other matters might be related
to title, easements over the property, and such things as CC&Rs and association rules.
Typically a buyer is given a period of time, say 2 - 3 weeks, to make inspections and
inquiries and to obtain reports to satisfy himself with regard to various contingencies.
This is sometimes referred to as the buyer's 'due diligence' period.
A simple but important question arises in this regard: How is the seller to know that
the buyer is satisfied? How is the contingency to be removed?
Previous standard purchase contracts have given the parties a choice between an
active method and a passive method of contingency removal. When using the passive
method of contingency removal, the contingency is removed if nothing is said and no
objection is raised, within the amount of time allotted. Silence means acceptance.
So, for example, a buyer might have a two-week contingency period to satisfy himself
with respect to the zoning of the property. If two weeks goes by and he says nothing,
then, if the passive method is being used, the contingency is deemed to be removed.
He can't come back a week later and say that he objects to the zoning.
If the active method of contingency removal were being used, then the buyer would
have to do something, usually in writing, to notify the other party that the
contingency has been removed.
As a matter of real estate practice the active method has generally been favored
in northern California, whereas the passive method is usually employed in southern
California. A good sociologist could probably make something out of that.
The new standard purchase contract published by the California Association of
Realtors® (CAR) no longer offers the choice between active and passive methods of
contingency removal. It opts for the active method, and a written notice is required
for the removal of various contract contingencies. So, southern California real
estate practitioners are going to have to change their ways.
The active method of contingency removal requires more paperwork (naturally there
are forms for such things), and most people don't like that. On the other hand,
the requirement of written contingency removal brings greater clarity and understanding
to the transaction. Everyone should like that.
Bob Hunt is a CAR director, and a former chairman of its Standard Forms Committee. He
is manager at the San Clemente office of RE/MAX Real Estate Services. His email address
is scbhunt@aol.com.
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