A contingency is a condition in a purchase contract that must be satisfied (or waived) for the transaction to proceed. If a contingency is not satisfied and the buyer properly exercises their right to cancel, they are entitled to a refund of their deposit and there is no breach of contract.
Once a contingency is removed (the buyer signs a contingency removal form waiving the right to cancel based on that condition), the buyer becomes committed to the transaction. If they then back out without a remaining contingency as justification, they risk losing their deposit (up to the liquidated damages limit).
Understanding CA contingencies — their default timeframes, how they are removed, and the consequences of removal — is heavily tested on the CA license exam.
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Purpose: Gives the buyer the right to conduct physical inspections of the property and to cancel if the results are unacceptable.
Default timeframe: 17 days from acceptance in the standard CA RPA.
What it covers:
Buyer's rights during the contingency period:
After removal: Once the inspection contingency is removed, the buyer no longer has the right to cancel based on property condition. If they back out, they risk their deposit.
What happens when something is found: The buyer can: (1) accept the property as-is, (2) request repairs or credits, (3) cancel and receive their deposit back. The seller is not obligated to make repairs — they can decline. If the parties can't reach agreement, the buyer can cancel (while the contingency is active) or accept (if they want to proceed despite defects).
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Purpose: Protects the buyer if they are unable to obtain the financing described in the purchase contract.
Default timeframe: 21 days from acceptance in the standard CA RPA.
Key provisions:
Appraisal contingency (separate in CA): The standard CA RPA actually includes a separate appraisal contingency — if the appraised value is less than the purchase price, the buyer can cancel and recover their deposit, OR they can negotiate with the seller to reduce the price. This is distinct from the financing contingency in that it applies even to cash buyers (who have no loan but still want the protection of an appraisal).
After removal: If the financing contingency is removed, the buyer represents they have secured financing (or are prepared to waive the condition). If they then fail to close due to a loan denial they were aware of, they risk their deposit.
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Purpose: Gives the buyer the right to review the Preliminary Title Report and cancel if they find title defects, encumbrances, or restrictions that are unacceptable.
Default timeframe: 17 days from acceptance in the standard CA RPA.
What buyers look for in the prelim:
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Purpose: When the buyer needs the proceeds from the sale of their current home to fund the purchase. Makes the transaction contingent on the successful close of the buyer's current property.
Impact on sellers: Sellers may be reluctant to accept offers with this contingency because it introduces uncertainty and delay. A seller who receives an offer with a sale contingency can include a right of first refusal (or "kick-out clause") — allowing them to continue marketing and potentially accept a better non-contingent offer, with notice to the contingent buyer to either waive the contingency or cancel.
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This is a frequently tested exam concept that distinguishes California from many other states:
Active removal: The buyer must take affirmative action — sign and deliver a written Contingency Removal form — to remove a contingency. If the buyer does nothing, the contingency remains in place. This is the approach California took historically.
Passive removal (current CA RPA standard): Under the current version of the CA RPA, contingencies are removed passively — they are deemed removed at the deadline unless the buyer takes affirmative action to cancel or request an extension. The buyer does not need to sign anything to remove a contingency; they just need to do nothing.
This means: if the inspection deadline passes and the buyer has not cancelled, the inspection contingency is automatically removed. The buyer's window to back out has closed.
Notice to Perform: If the buyer appears to be stalling or failing to meet contingency deadlines, the seller can issue a Notice to Perform (NTP), giving the buyer 2 business days to remove contingencies or cancel. If the buyer neither removes nor cancels, the seller may then cancel the contract and retain the deposit (subject to liquidated damages rules).
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Under the CA RPA, when a buyer wants to formally remove contingencies, they sign a Contingency Removal (CR) form identifying which contingencies are being removed. Partial removal is possible — the buyer might remove the inspection contingency while keeping the financing contingency active.
After all contingencies are removed:
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A California buyer's earnest money deposit is at risk once contingencies are removed. The amount at risk is governed by whether the liquidated damages clause was initialed:
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Quiz Questions:
Q1. Under the standard California RPA, what is the default timeframe for the buyer's inspection contingency?
A) 7 days from acceptance B) 10 days from acceptance C) 17 days from acceptance D) 21 days from acceptance
Answer: C — The standard CA RPA provides a 17-day default inspection contingency period from the date of acceptance. The financing contingency default is 21 days. These are default periods — the parties can negotiate shorter or longer timeframes in the contract.
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Q2. The inspection contingency deadline in a CA RPA passes and the buyer does not take any action (neither cancels nor signs a contingency removal form). Under the current CA RPA passive removal standard, what happens?
A) The contingency automatically extends another 7 days B) The inspection contingency is automatically removed — the buyer can no longer cancel based on inspection findings C) The buyer still has the right to cancel at any time before close of escrow D) The seller must issue a Notice to Perform before the contingency can lapse
Answer: B — Under California's current passive removal standard, contingencies lapse at the deadline if the buyer takes no action. Doing nothing removes the contingency — the buyer is no longer protected by it. This is different from an active removal standard where the buyer must sign something to remove contingencies.
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Q3. A buyer removes all contingencies on a $1,000,000 California home purchase. Their deposit is $30,000 and the liquidated damages clause was properly initialed. Three weeks later, the buyer calls to cancel because they've changed their mind about buying the house. How much of the deposit can the seller keep?
A) $30,000 (the full deposit) B) $30,000 — but the seller can also sue for additional damages C) $30,000 (3% of $1,000,000 = $30,000 — deposit exactly equals the cap) D) Nothing — the buyer can always cancel for any reason
Answer: C — 3% of $1,000,000 = $30,000. The deposit happens to equal exactly the liquidated damages cap. The seller may keep the entire $30,000 deposit. The buyer cannot cancel without consequence after removing all contingencies.
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Q4. A seller lists their home and receives an offer contingent on the buyer selling their current home. The seller wants to continue marketing the property. What provision should the seller include in their counter offer to protect their ability to accept a better non-contingent offer?
A) A liquidated damages clause B) A right of first refusal / kick-out clause C) A Notice to Perform clause D) A subordination clause
Answer: B — A kick-out clause (right of first refusal) allows the seller to continue marketing the property while the contingent offer is in effect. If the seller receives a better non-contingent offer, they notify the contingent buyer, who then has a short window (typically 72 hours) to either remove their sale contingency or have the contract cancelled.
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Q5. A buyer's financing contingency deadline passes. The buyer has been approved for the loan but forgets to sign the contingency removal form. Under CA RPA passive removal rules, is the financing contingency still protecting the buyer?
A) Yes — the buyer must actively sign a contingency removal form for the contingency to lapse B) No — under passive removal, the financing contingency automatically lapses at the deadline even without the buyer's signature C) Yes — financing contingencies in CA can never be passively removed D) No — the lender automatically notifies escrow when the loan is approved, which removes the contingency
Answer: B — Under California's current passive removal standard, the financing contingency (like all contingencies in the RPA) lapses at the deadline unless the buyer actively cancels or requests an extension. Forgetting to sign a contingency removal form doesn't protect the buyer — the contingency is gone. The seller could issue a Notice to Perform if there is any ambiguity about the buyer's status.