ForeclosuresMass - ForeclosuresMass Monthly - Interview with the Expert - Know How to Use Your Contingencies (September 2007)

People new to real estate mistakenly believe you can use "escape clauses" to get out of real estate contracts. In actuality, the courts look unfavorably at "escape clauses."

A much better way to protect your interests - as either a buyer or a seller - is to include contingencies in the Offer to Purchase and the Purchase and Sale Agreement.

To explain contingencies, we caught up with David Camiel. David, a veteran real estate lawyer, was happy to explain the legal ins and outs of contingencies, and the ways you can use them to your advantage.

David Camiel: A contingency is a formal clause, which states the buyer or the seller has to meet certain conditions for the real estate transaction to proceed to the next step. If the conditions of the contingency are not met, the seller or the buyer can cancel the contract without being liable for breach of contract. The reason the term "escape clause" is a misnomer is because it implies you can easily get out of a real estate contract - for something as simple as a change of heart.

* Next 37 17 investors only!

FMM: Do real estate contracts automatically come with contingencies? In other words, can you simply find a "form" or contract template that includes them?

DC: The short answer - no. This is one reason you want to work with an experienced and licensed real estate agent and a real estate lawyer. You want to ensure both the Offer to Purchase and the Purchase and Sale Agreement don't allow the seller or the buyer to back out and leave you in the lurch. You also want to make sure the contingencies are correctly worded and protect your interests.

DC: The contingency most real estate investors know is the home inspection contingency. This contingency is contained in the Offer and expires prior to execution of the Purchase and Sale Agreement. The inspection contingency protects the buyer as it allows him or her to get out of the agreement due to almost any home inspection issue.

However, the property inspection must take place within the contingency period provided for in the Offer, which is usually seven to ten days of the Offer to Purchase date. As the seller, you do not want this contingency to survive into the Purchase and Sale Agreement. If you need quick turnaround on the property, you want to get the buyer to commit as soon as possible.

In addition to the home inspection contingency, you also have the radon, termite, and Title V (septic) contingencies. Let me take each one in order:

For the radon contingency, a buyer can get out of the agreement if tests show radon in excess of EPA limits. However, a carefully drafted radon contingency will allow a seller to remediate the levels of radon if they are found to be high, without giving the buyer the freedom to terminate the agreement.

If the home inspector finds termite activity or damage from previous activity, then the buyer can legally terminate the transaction.

As most Massachusetts investors probably already know, sellers must now provide a certificate from the state demonstrating that the septic system has been inspected. Also known as Title V, this regulation is causing a number of problems as sellers scramble to finance septic upgrades when they learn that their system is out of compliance. Fortunately, buyers are not required to take Title to properties that don't meet the criteria of Title V.

FMM: What is the status of the mortgage contingency given today's financial market upheavals?

DC: That's a great question. Buyers can include a mortgage contingency in the contract - if they can't get financing by a certain date, they can terminate the contract and get their deposit back. Buyers really have to watch that mortgage contingency date because if they let the date lapse, and then don't close, the Seller can keep their deposit. Sellers can give themselves a comfort level by including language in the contract that requires the buyer to provide a copy of their commitment. Unfortunately, with recent uncertainty in the secondary market, some lenders are being forced to pull commitments on loans even after they've been issued.

FMM: Are there other contingencies at this stage of the transaction that can help buyers and sellers?

DC: Buyers should always include a Title contingency. If the Title search shows any problems - big or small - the buyer then has the opportunity to back out of the agreement. However, the seller can include a contingency that he or she has 30 days to clean up the Title issue.

FMM: What contingencies come into play once a transaction has progressed to the Purchase and Sale agreement stage?

DC: What we're seeing right now is buyers using the Sale of Home Contingency. Buyers use this contingency to get out a real estate transaction if they don't sell their current home by a certain date. Sometimes a seller will state the agreement is subject to them finding "suitable housing" - they then terminate the contract for failure to find a new home and the buyer is out of luck.

I advise my clients who are selling a property to include in the contingency a clause that states that if another buyer makes an offer not contingent upon the sale of their home, then the seller can terminate the first agreement.

DC: Don't skim over your real estate agreements. Have a real estate attorney ensure that your contracts and contingencies are carefully and correctly worded - whether you're the buyer or the seller. You'll save considerable time and money in the long run.

David Camiel heads up the Law Offices of David A. Camiel, a Massachusetts real estate law firm with three greater Boston locations. He can be reached by phone at 617-244-4155 or via his firm's website at www.camiellaw.com.

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