Contingencies

What are Contingencies? 

To understand contingencies, we must first understand the concept of Earnest Money. Earnest Money is often described as a “good faith deposit” made by the buyer to show that they have skin in the game. Depending on the situation, earnest money usually ranges from 1% to 5% of the purchase price and is usually due to escrow within 2 to 3 business days after mutual acceptance. It acts as a remedy for the seller if the buyer defaults on the contract – i.e. if the buyer backs out of the transaction without the contractual right to back out, the earnest money will probably be due to the seller. We include contingencies to give the buyer the contractual ability to back out, or “unilaterally terminate” without losing their earnest money.  

The NWMLS has provided us with dozens of addenda which can add contingencies to a transaction. Some of the most common contingencies include:  

• Form 22A – Financing and Appraisal Contingencies 

• Form 22S – Septic Contingency 

• Form 22T – Title Contingency 

• Form 22VV – Homeowners Insurance Contingency 

• Form 35 – Inspection contingency 

• Form 35F – Feasibility Contingency 

Some contingencies, like the 35 – Inspection, 35F – Feasibility, and 22S – Septic contingencies are known as “subjective contingencies”. This means that the buyer can back out of the transaction for any reason. These contingencies are viewed as “get out of jail free cards” while the timelines remain active.  

Other contingencies require specific events to occur before the buyer can back out and retain the earnest money. For example, the 22A Financing contingency requires: 

1) The Buyer must be denied financing by their lender.   

2)The Buyer must then deliver a form 90I – Buyer’s notice of termination (financing unavailable) on or before the closing date.  

3) Then, within 20 days of the notice of termination, Buyer must then provide the seller with a denial letter from the lender that includes: 

1. the date theBuyer’s loan application was made, including a copy of the loan       estimate  
2. proof that the buyerpossessed sufficient non-contingent funds to close and  
3. the reasons Buyer was unable to obtain financing. 

This is just one example of a contingency that requires specific steps to be taken for the buyer to terminate the transaction and retain their earnest money. While some contingencies allow for the transaction to automatically terminate if specific events occur, the rule of thumb is a notice of termination must be delivered for the transaction to be terminated and the earnest money returned to the buyer. Each contingency will have its own notice of termination, but the most common notice you will use to terminate a transaction is the Form 35R – Inspection Response. We will go over the 35R in detail in a future lesson.  

Once a transaction has been terminated using the proper notice of termination, escrow will require specific instructions to disburse the earnest money: we use the Form 50 as these instructions. The Form 50 tells escrow how much of the earnest money needs to be disbursed to whom. Most of the time, you will fill it out so that the entirety of the earnest money will be disbursed back to the buyer. This form must be signed by Buyer, Buyer Broker (yourself), Seller, and Listing Agent.  

Best practice is to send the filled-out Form 50 with the notice of termination and ask the Listing Agent to get it signed and returned at their earliest convenience. This ensures the earnest money is returned to your buyer in a timely fashion.  

Why we DON’T use a Form 51: Some industry professionals are under the impression that a Form 51 – Rescission Agreement should be used to disburse earnest money once a transaction has been terminated. This is incorrect. If a transaction was terminated under a contingency with the proper notice of termination, the deal is dead and there is no agreement to rescind. There is a good chance you will never find yourself in a situation where a Form 51 should actually be used. 

The Form 51 is not a unilateral notice of termination. While it can be used to kill a deal, it requires both buyer and seller to agree to rescind the contract. Trying and failing to use a Form 51 to terminate a transaction (instead of using the proper notice of termination) is an easy way to get yourself into very hot water.