The 7 Contingency Clauses Every Real Estate Attorney Should Review First
Why Contingencies Deserve Your First Look
Contingency clauses are the escape hatches of real estate transactions. They define the conditions under which a buyer can walk away from a deal without forfeiting their earnest money. For the attorney reviewing a purchase agreement, contingencies are where risk concentrates. A missing contingency exposes your client. A poorly drafted one creates ambiguity that may not resolve in their favor. An overly aggressive one can kill a deal before it starts.
Here are the seven contingency clauses that deserve your attention first, ranked by the frequency and severity of problems they create in practice.
1. Inspection Contingency
Risk Level: Critical
The inspection contingency gives the buyer the right to have the property professionally inspected and, depending on the findings, to negotiate repairs, request a price reduction, or terminate the contract entirely. It is the single most litigated contingency in residential real estate.
What can go wrong: Vague language around what constitutes a "material defect" versus a cosmetic issue. Inspection periods that are too short for the property type, particularly for commercial or multi-unit residential properties where specialized inspections are required. Ambiguity about whether the buyer must provide the seller with inspection reports. Clauses that require the buyer to accept the property "as-is" after the inspection period expires, even if new defects are discovered.
What to look for: Confirm the inspection period is adequate. Residential properties typically need 10 to 15 business days. Commercial properties may require 30 or more. Verify that the buyer retains the right to terminate for any reason during the inspection period, not just for defects exceeding a specific dollar threshold. Check whether the clause addresses environmental inspections, pest inspections, and structural assessments separately or lumps them together.
2. Financing Contingency
Risk Level: Critical
The financing contingency protects the buyer if they cannot obtain mortgage approval on specified terms. Without it, a buyer who fails to secure financing is still contractually obligated to close and risks losing their earnest money deposit.
What can go wrong: The contingency specifies loan terms that are too narrow, such as a specific interest rate that becomes unavailable due to market movement. The clause does not define what "good faith effort" the buyer must demonstrate in pursuing financing. The deadline for removing the contingency precedes the realistic timeline for loan approval in the current lending environment.
What to look for: Ensure the financing terms include reasonable ranges for interest rate and loan type rather than fixed numbers. Verify that the contingency covers the specific loan program the buyer intends to use. Check whether the clause addresses what happens if the lender requires additional conditions after the contingency deadline passes. Pay particular attention to cash-out refinance situations where the contingency may not apply as expected.
3. Appraisal Contingency
Risk Level: High
The appraisal contingency allows the buyer to renegotiate or withdraw if the property appraises below the purchase price. In competitive markets, buyers are often pressured to waive this contingency, which creates substantial financial risk.
What can go wrong: The clause fails to specify what happens if the appraisal comes in below the purchase price but above the loan amount. There is no mechanism for the seller to cure a low appraisal by reducing the price. The contingency does not address the scenario where the lender orders a second appraisal.
What to look for: Confirm the contingency clearly states the buyer can terminate if the appraised value falls below the purchase price. Check whether there is a gap clause requiring the buyer to cover a difference up to a specified amount. Verify the timeline aligns with the lender's appraisal process, which can take two to four weeks in busy markets.
4. Title Contingency
Risk Level: High
The title contingency gives the buyer the right to review the title commitment and object to any encumbrances, liens, easements, or defects that are unacceptable. Title issues that go unaddressed before closing can create years of legal headaches.
What can go wrong: The review period is too short for the buyer's attorney to conduct a thorough title examination. The clause does not specify which title exceptions are automatically accepted and which require buyer approval. The seller's cure period is inadequate for resolving complex title defects such as boundary disputes or unreleased mortgages. The contingency does not address what happens when a title search reveals previously unknown easements that affect the property's intended use.
What to look for: Ensure the buyer has a minimum of 10 business days to review the title commitment. Verify the clause requires the seller to deliver marketable title, not just insurable title, as these are materially different standards. Check whether standard exceptions in the title policy are acceptable for the transaction type. Confirm the clause addresses survey review as part of the title contingency rather than treating it as a separate item.
5. Sale of Current Home Contingency
Risk Level: Moderate to High
This contingency makes the purchase conditional on the buyer successfully selling their existing property. It is common in residential transactions and creates significant timeline complexity.
What can go wrong: The contingency does not specify a deadline by which the buyer's current home must be under contract or closed. The clause is silent on whether the seller can continue marketing the property and accept backup offers. There is no mechanism for the seller to issue a notice requiring the buyer to remove the contingency within a specified period or release the property.
What to look for: Verify the clause includes a specific deadline, typically 30 to 60 days for the buyer's home to go under contract and 90 days for closing. Confirm whether the seller retains the right to continue showing the property. Check for a kick-out provision that allows the seller to accept another offer while giving the existing buyer a window to remove the contingency. Ensure the clause defines what "sale" means: under contract, closed, or funded.
6. Insurance Contingency
Risk Level: Moderate
The insurance contingency allows the buyer to terminate if they cannot obtain adequate property insurance at a reasonable cost. This contingency has become increasingly important as insurance markets tighten in certain regions.
What can go wrong: The clause does not define what constitutes "reasonable" insurance cost, creating disputes about whether the buyer's standard has been met. The contingency does not address flood insurance, which may be required by the lender but unavailable or prohibitively expensive. The review period does not allow enough time for the buyer to obtain quotes from multiple carriers, particularly for properties in high-risk zones.
What to look for: Ensure the contingency specifies both the type and amount of coverage required. Verify it addresses lender-required insurance separately from the buyer's desired coverage. Check whether the clause accounts for recent changes in insurance availability in the relevant market. Confirm the timeline allows at least two weeks for insurance shopping, longer in areas with limited carrier availability.
7. Kick-Out Contingency
Risk Level: Moderate
A kick-out clause is not a buyer protection but rather a seller mechanism that modifies another contingency, typically the sale-of-home contingency. It allows the seller to continue marketing the property and, upon receiving another acceptable offer, to give the original buyer a specified window to remove their contingencies or release the property.
What can go wrong: The notice period is too short for the buyer to realistically arrange alternative financing or waive conditions. The clause does not specify how the seller must deliver notice to the buyer. The kick-out applies only to the sale-of-home contingency when it should arguably apply to financing as well. The clause is ambiguous about whether the buyer must waive all remaining contingencies or only the one that triggered the kick-out.
What to look for: Confirm the buyer receives a minimum of 48 to 72 hours to respond to a kick-out notice. Verify the notice delivery method is clearly specified. Check whether the clause defines the terms under which the buyer can waive, including whether they must demonstrate financial ability to close without the contingency. Ensure the clause addresses what happens to the earnest money if the buyer elects to terminate rather than waive.
A Note on Waiving Contingencies
In competitive markets, buyers face pressure to waive contingencies to make their offers more attractive. As the reviewing attorney, your role is to ensure your client understands what they are giving up. Every waived contingency transfers risk from the seller to the buyer. That risk should be quantified to the extent possible and accepted with clear eyes, never glossed over in the rush to win a bidding war.
The best practice is to review contingencies before any other section of the contract. They set the risk framework for the entire transaction. Everything else is detail.