Estimated study time: 45 minutes
Content:
A contingency is a condition in a real estate contract that must be satisfied (or waived) for the contract to become fully binding or for the sale to close. If a contingency is not satisfied, the party protected by it generally has the right to terminate the contract and recover the earnest money deposit. Massachusetts Purchase and Sale Agreements commonly include several standard contingencies. The three most important are: (1) the mortgage (financing) contingency; (2) the inspection contingency; and (3) in some transactions, a sale contingency. All contingencies have specific deadlines; failure to satisfy or waive a contingency by the deadline generally results in either the contingency being waived automatically or the protected party losing their right to invoke it.
The mortgage contingency is the most commonly litigated contingency in Massachusetts. It typically provides that the buyer's obligation to close is contingent upon obtaining a written mortgage commitment for a specified loan amount at specified terms (interest rate, loan type) within a specified number of days from the P&S date. The buyer must make a diligent good-faith effort to obtain financing — simply not applying is not a valid exercise of the contingency. If the buyer cannot obtain the specified financing after a diligent effort, the buyer may terminate the contract and recover the deposit. If the buyer receives a mortgage commitment but later the lender revokes it (e.g., due to a title problem or a change in the borrower's financial status), the situation may not be covered by the contingency depending on the specific language.
The inspection contingency gives the buyer the right to conduct professional inspections — building/home inspection, pest inspection, radon test, oil tank sweep, Title 5 septic inspection, lead paint inspection — within a specified period (typically 7–14 days from the P&S date or from the offer date). If the inspection reveals material defects, the buyer has options depending on how the contingency is worded: (a) unconditionally terminate and recover the deposit (the most buyer-protective version); (b) negotiate repairs or a price reduction; or (c) proceed with the transaction. Many Massachusetts P&S agreements use a "satisfactory inspection" standard where the buyer has some discretion but must exercise it in good faith. Buyers who waive the inspection contingency take the property "as is."
The sale contingency makes the buyer's obligation to purchase contingent on the buyer successfully closing on the sale of their current home by a specified date. Sellers are often reluctant to accept sale contingencies in competitive markets because the seller's home remains off the market until the buyer's home sells. In hot markets, sellers commonly require a "kick-out clause" (also called a right of first refusal or 72-hour clause): if the seller receives another acceptable offer, the seller gives the original buyer notice, typically 72 hours, to either waive the sale contingency and proceed (by demonstrating financing ability) or release the seller to accept the new offer. Understanding how these contingency clauses interact is critical for real estate practice in Massachusetts.
Key Terms:
Quiz Questions:
Q1. A buyer signs a P&S with a mortgage contingency requiring a written commitment within 21 days. On day 18, the buyer stops communicating with the lender and never submits required documents. On day 22, the buyer's attorney sends notice of termination for failure to obtain financing. Can the buyer recover the deposit?
A) Yes — the buyer did not receive a commitment by the deadline and may terminate under the contingency B) No — the buyer failed to make a diligent good-faith effort to obtain financing and cannot invoke the contingency C) Yes — the mortgage contingency automatically protects the buyer regardless of the buyer's actions D) No — the seller is entitled to the deposit plus damages for the buyer's bad faith
Answer: B — The mortgage contingency protects buyers who cannot obtain financing despite a diligent good-faith effort. A buyer who fails to cooperate with the lender cannot invoke the contingency. The seller is entitled to retain the deposit.
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Q2. A buyer's home inspection reveals the furnace is at the end of its useful life and may need replacement within two years at a cost of $5,000. The inspection contingency allows the buyer to withdraw for any unsatisfactory condition. The seller offers a $2,500 credit. The buyer refuses the credit and terminates. What is the likely outcome?
A) The buyer must accept the credit and close — a furnace at end of life is a normal condition B) The buyer may terminate under the "satisfactory inspection" contingency; the deposit is returned C) The seller keeps the deposit because the defect was disclosed and the seller offered a remedy D) The result depends on whether the buyer had the furnace independently appraised
Answer: B — Under an unconditional "satisfactory inspection" contingency, the buyer generally has the right to terminate for any condition revealed by the inspection, subject to a good-faith requirement. The seller's offer of credit does not obligate the buyer to accept it if the contingency language allows termination.
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Q3. A seller accepts an offer with a sale contingency. Three weeks later, the seller receives a better offer. The P&S contains a 72-hour kick-out clause. What must the seller do?
A) Accept the new offer immediately and notify the original buyer that the contract is terminated B) Reject the new offer — the seller is contractually bound to the original buyer C) Give the original buyer written notice of the new offer; the original buyer has 72 hours to waive the sale contingency or release the seller D) Ask the original buyer to match the new offer within 72 hours
Answer: C — The kick-out clause requires the seller to provide written notice to the original buyer when a superior offer is received. The original buyer then has 72 hours to either waive the sale contingency (and demonstrate ability to proceed without selling their current home) or release the seller to accept the new offer.
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Q4. A buyer waives the inspection contingency in a competitive multiple-offer situation. After closing, the buyer discovers the basement has serious water infiltration problems. What is the buyer's legal position?
A) The seller must repair the damage because water infiltration is a latent defect B) The buyer takes the property as-is; waiving the inspection contingency generally means accepting the property in its existing condition C) The buyer may rescind the sale because water damage is always a material defect D) The buyer may sue the real estate agent for not disclosing the defect
Answer: B — Waiving the inspection contingency means the buyer accepts the property in its current condition. Unless the seller made specific misrepresentations or knowingly concealed the defect, the buyer's waiver of the inspection is generally their assumption of risk for conditions that could have been discovered by inspection.
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Q5. A mortgage contingency in a P&S specifies financing at 6.5% interest or lower. The buyer receives a commitment at 7.25%. Can the buyer terminate and recover the deposit?
A) No — the buyer received a mortgage commitment, which satisfies the contingency B) Yes — the commitment does not meet the specified terms (6.5% or lower); the buyer may terminate under the contingency C) No — interest rate changes are a known market risk not covered by the contingency D) Yes — but only if the buyer can demonstrate no other lenders are offering 6.5%
Answer: B — A mortgage contingency specifying particular terms (loan amount and interest rate) requires a commitment meeting those terms to satisfy the contingency. If the commitment is at 7.25% and the contingency requires 6.5% or lower, the contingency has not been satisfied and the buyer may terminate.
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