5 Essential Contract Clauses to Have on Hand

Clauses

Most brokerages use form purchase agreements supplied by their local Board of Realtors. Many of those forms have been updated over the years to include the most frequently used contingencies. Namely financing and inspection contingencies.

However, in a hot and competitive real estate market, clients are seeking to have other clauses added to their purchase offers. This is to give them either an advantage or flexibility in the transaction. Below are 5 sample contract clauses to have on hand when preparing a purchase offer or a counteroffer for your clients.

1. “As Is” Clause

The “As Is” Clause is used by sellers to avoid having to disclose latent defects with the property. Latent defects are those defects that cannot be discovered by a reasonably diligent inspection. A buyer who accepts an “As Is” contract is agreeing to rely on their own inspections and tests in determining the condition of the property and whether to purchase.

Proposed clause:

The Seller is selling this property in “As Is” condition. Buyer acknowledges and agrees that Buyer is accepting the Property “As Is” without any warranties, representations or guarantees, either expressed or implied, of any kind, nature or type whatsoever from or on behalf of the Seller.

2. Home Sale Contingency

A buyer may need to use proceeds from the sale of their home for the purchase of a new home. In this case, a buyer may want to utilize a home sale contingency. The home sale contingency allows the buyer to terminate the purchase contract if their home does not sell within a specified time period.

Proposed clause:

This Agreement is contingent on Buyer accepting an offer for the sale of Buyer’s property located at (address), on or before (date/time) (the “Contingency Expiration Date”). If Buyer does not accept an offer, Buyer may terminate this Agreement on or before the Contingency Expiration Date by delivering written notice of termination to the Seller or Seller’s Agent. If Buyer fails to terminate this Agreement on or before the Contingency Expiration Date, Buyer shall be deemed to have waived this Home Sale Contingency.

3. “Bump Out” Clause

A seller may want to continue to market their property while the buyer is working through clearing contingencies (financing, inspection, appraisal, etc.). If the seller obtains another offer, this clause will allow the seller to demand the buyer waive pending contingencies. If the buyer cannot or refuses to waive the contingencies, the purchase contract terminates and the seller can accept the other offer.

Proposed clause:

The Buyer and Seller agree that the Seller may continue to market the Property for sale. If Seller receives an acceptable bona fide offer, Seller or Seller’s Agent may deliver written notice of the offer to the Buyer or the Buyer’s Agent. Within ______ (time) (“Bump Out Deadline”) of Buyer’s receipt of the written notice, Buyer must remove the (list contingencies) contingencies. If Buyer refuses to remove the contingencies by the Bump Out Deadline, the Seller shall have twenty-four (24) hours after the Bump Out Deadline, to terminate this Agreement, by delivering written notice to the Buyer or Buyer’s Agent. If Seller does not terminate this Agreement, the Bump Out Clause is deemed permanently waived by the Seller, with no further attempts to “Bump Out” permitted.

4. Escalation Clauses

In a multiple offer situation, a buyer may want to have the right to “escalate” the purchase offer above any competing offers. Problems can arise when the seller is trying to compare apples to oranges (i.e. one offer may have seller paid closing costs and the other does not). The clause below requires the seller to compare each net offer and caps the escalation to a final purchase price.

Proposed clause:

When Buyer’s Net Purchase Offer (the purchase price less any Buyer’s closing costs paid by Seller, any Seller paid real estate commission and any Seller paid home warranty costs) is less than the Net Purchase Offer of any competing bona fide offer(s), Buyer agrees to pay $_____________ more than the next highest Net Purchase Offer, but not to exceed a final purchase price, in the Real Estate Purchase Contract, Paragraph 1, of $__________________. In the event the Seller seeks an escalation of the Buyer’s purchase price, Seller shall provide Buyer a copy of the competing purchase offer to justify the escalation.

5. Backup Offer Clause

A seller may want to accept a backup offer, which would become a primary offer if the initial buyer is unable to close. This clause allows the backup buyer to withdraw the purchase offer at any time prior to becoming the primary contract.

The Buyer and Seller agree this offer is a backup offer because the Property is currently subject to a previously accepted purchase agreement. The Buyer may withdraw this backup offer at any time prior to Seller’s acceptance as the primary contract, by delivering written notice to Seller or Seller’s Agent.

Remember that any purchase agreement is a legally binding contract. Thus great care must be taken to be sure that a client’s interests are protected through the use of contingencies and other clauses. Every real estate transaction is unique. Therefore, it’s recommended that you consult with your brokerage’s legal counsel before implementing any of the clauses discussed above. Any variation of these clauses should be made by legal counsel. Of course, always recommend your clients discuss any questions with their own counsel.

The clauses discussed in this article are for informational and example purposes only and not for the purpose of providing legal advice.