Introduction. Generally, a contingency is an event that must occur (or not occur)[1] for the transaction to become binding (e.g., loan approval, condition of title, inspection report, sale of existing home, etc.). The reason it is called a “contingency” is that the transaction is contingent upon the event occurring (or not occurring), such as loan approval.
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- If the buyer is not approved for the loan, buyer must timely notify the seller or seller’s agent, and the transaction is terminated, and the deposit refunded.
- If Buyer is approved, that contingency is deemed “satisfied” and goes away.
- After expiration of the agreed-upon contingency period, e.g., for professional inspection, the buyer is no longer able to withdraw without losing the deposit.
All contingencies in the OREF pre-printed Sale Agreement are for the benefit of the buyer. This means that the seller cannot use the failure of a buyer’s contingency to terminate the transaction – only the buyer can do that.
There are seller contingencies – e.g., finding a replacement property – but they are not found in the Sale Agreement form itself. They must be added by addendum. OREF now has a replacement property contingency addendum for sellers to use.
Below is a summary of the buyer contingencies in the 2022 OREF Sale Agreement. They are discussed in the order they appear in that document. (Note that the line and section numbers may be different today.)
- Sections 5.1 (Financing Contingencies) and 5.2 (Failure of Financing Contingencies). This section applies if any portion of the purchase price is being financed. It sets out the following contingencies:
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- The buyer and property must both qualify for the loan;
- The lender’s appraisal cannot be less that the purchase price of the subject property.
- Buyer must obtain the loan from the lender (unless failure to obtain the Loan is due to the fault of buyer).[2]
If Buyer receives actual notification from the Lender that any Financing Contingencies have failed or otherwise cannot occur, Buyer is to promptly notify Seller, and the parties will have a certain number of business days (two [2] if not filled in), to either:
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- Terminate the transaction; or
- Reach a written agreement with seller on price and terms that will permit the transaction to [Note, notwithstanding this negotiation period, the parties are not required to reach an agreement – if they fail to do so, the transaction is terminated and the deposit is refunded.]
Risk Management Tip. Section 5.3 of the Sale Agreement lists buyer’s financing obligations. They are important, as timing is everything. The first obligation, for example, is that within three business days, the buyer must submit a “completed loan application” to the same lender as the one that prepared the preapproval letter. Buyer agents should make sure their clients understand this, and not apply to a different lender without seller’s consent.
Secondly, the “completed loan application” must include: (i) Buyer’s name(s); (ii) Buyer’s income(s); (iii) Buyer’s social security number(s); (iv) the Property address; (v) an estimate of the value of the Property, and (vi) the loan amount sought.
Why is this important? Because if the buyer submits an incomplete loan application, the lender is not required to perform in accordance with the time protocols mandated by the TILA-RESPA Integrated Disclosure Act (“TRID”), which requires that the Loan Estimate be issued with three business days following receipt of the completed loan application. If the application is incomplete, e.g., it does not identify the property address, the Loan Estimate might be issued, but does not have to be done within three business days. Thus, an incomplete application could slow down the loan approval process, which would not make the seller very happy. If the loan is delayed due to this noncompliance, and the financing contingency fails, seller could refuse to consent to escrow’s release of the deposit back to buyer.
- Sections 6. (Seller-Carried Financing). This contingency requires that seller and buyer reach a written agreement specifying the terms and conditions of such financing (e.g., down payment, interest rate, amortization, term, payment dates, late fees, and balloon dates) within a certain number of business days – 10 if not filled in (the “Negotiation of Terms Period”). If they fail to reach agreement by 5:00 m. on the last day of that Period, all Deposits are to be refunded to buyer and the transaction is terminated.
Risk Management Tip. There is a reasonable likelihood that one or both of the parties may retain an attorney for this work, which means that the ten-business day period may be inadequate. If buyer’s agent knows their client will retain counsel, the forms should be prepared in advance before the offer is made. The good thing about the OREF Seller Carried Addendum is that it identifies the major terms of the seller-carry back documents, so even if buyer retains counsel, the Addendum sets out the parameters of the terms. In short, there should not be as much “negotiating” as otherwise, thus shortening the time frame for completion of the documents. If the lawyer does not get the documents prepared by the deadline, and no extension is sought, either party may withdraw from the transaction.
- Section 9 (Title Insurance). This contingency requires the seller to order the preliminary title report (“PTR”) within only one business day after the parties have entered into the Sale Agreement. The PTR must include copies of, or links to, all identified documents of Unless the parties agree otherwise, the transaction is subject to Buyer’s review and approval of the PTR and recorded documents.
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- Upon receipt of the PTR and title documents, buyer will have a fixed period of business days – 5 if not filled in – to notify seller, in writing, of any objections to the disclosed public record matters. The failure to do so “…will constitute acceptance of the Report and Documents.”
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- Upon receipt of buyer’s objections, Seller will have a fixed number of business days – 5 if not filled in – to either (a) remove the objected-to exceptions, (b) correct them, or (c) give reasonable written assurances to the buyer that they will be removed prior to closing. Unless buyer waives this contingency, the seller’s failure to either remove, correct, or give written assurances, will result in termination of the transaction and a return of the deposit to buyer.
Risk Management Tip. One business day to open escrow and order the PTR is very short. Since “time is of the essence”[3] even one business day of delay is material. [4] This arguably means that a buyer could withdraw from the transaction on account of the seller’s (or seller’s agent’s) inadvertent delay in opening escrow and ordering the PTR. If there is any anticipated delay, seller’s agent should make sure buyer is notified and consents.
Secondly, many Realtors® are not conversant with PTRs or the information they convey. Neither are buyers. This means there is a distinct possibility that problematic issues with the PTR will not become immediately apparent upon issuance. While Oregon’s standards of practice do not require real estate licensees to understand exceptions in the PTR, that certainly doesn’t prevent them from encouraging their buyer-clients to secure expert assistance for review. Issues such as unexpected assessments, liens or judgments against title need to be reviewed by an expert.[5] But most important[6] is the existence of non-standard easements, i.e., almost anything other than utility easements. E.g., access and view easements should always be reviewed by an expert. Also, any easements that limits use of the property.
[Part Two: Discussion of remaining contingencies in OREF 2022 Sale Agreement.]
©Copyright 2022 QUERIN LAW, LLC. Phillip C. Querin
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[1] I say “not occur” because the professional inspection contingency is tied to buyer not rejecting the report. Same for the title contingency.
[2] This is a new provision as of 2022. At the present time I am not clear what it adds to the other two which have existed for years. Is there a situation in which (a) the buyer and property qualify for the loan and (b) the appraisal is less that the agreed-upon purchase price, in which the buyer did not obtain the loan (without causing it to happen)? Perhaps if the lender goes out of business or secures some form of bankruptcy protection? But if that were the case, the contract fails because a necessary element of the transaction failed; the reality of that situation would likely be that buyer secures another loan and closes with the appropriate addenda and cooperation of seller.
[3] Section 37(1) TIME: Time is of the essence of this Agreement.
[4] Section 28.2 Earnest Money Refund to Buyer: provides that the deposit will be promptly refunded to buyer “…if Seller fails to complete this transaction in accordance with the material terms of this Agreement…”
[5] However, this section provides that: “Buyer’s failure to timely object will not relieve Seller of the duty to convey marketable title to the Property pursuant to Section 30 (Deed) below.” This means that matters on the public record that would make seller’s title unmarketable will not be waived even though the buyer failed to timely object to them in the PTR review period.
[6] The reason non-financial exceptions in the PTR are so important is that they do not typically get any attention from escrow since they do not normally affect the marketability of title. So, without buyer review, recorded easements could easily slip by without objection. Reviewing an objectionable easement after closing is too late – buyer cannot then withdraw from the transaction. But financial exceptions will affect marketability, so escrow will have to address their removal with the parties before closing.
