Contingency Removal Process

A contingency is a condition that must be met in order for a real estate contract to become binding. The most common would be seller disclosure statement, inspection, financing and appraisal contingencies in a residential real estate transaction. The contingencies can either be lifted actively or passively, where the most standard method being active contingency removal.

Passive vs. Active Contingency Removal

Passive contingency removal means that when deadline passes and the parties in contract have not canceled the agreement, by default they are deemed to have removed their contingencies. Whereas, active contingency removal means that when deadline passes, if the parties have not removed their contingencies in writing, they still retain it. For example, the Residential Purchase Agreement (CAR Form RPA) defaults to a 17 day time allowance for a buyer to do their due diligence, on the 18th day, the buyer will need to submit a contingency removal form to actively remove their contingencies, if no form has been submitted, then the contingencies are still in place.

Lifting Contingencies

At the end of the contingency period, the buyer is supposed to sign off on contingencies or cancel the transaction per Paragraph 14B(3) of the RPA, “[b]y the end of the time specified in paragraph 14B(1) (or as otherwise specified in this Agreement), Buyer shall Deliver to Seller a removal of applicable contingency or cancellation of this agreement (C.A.R. Form CR or CC) of this Agreement.” In other words, at the end of the default contingency period of 17 days, unless otherwise agreed by both parties, the buyer either lifts or cancels.

Further, Paragraph 14B(4) states “[e]ven after the end of the time specified in paragraph 14B(1) and before Seller cancels, if at all, pursuant to paragraph 14D, Buyer retains the right, in writing, to either (i) remove remaining contingencies, or (ii) cancel this Agreement based on a remaining contingency.” It is not until the buyer lifts all their contingencies that their deposit can be forfeited. The buyer can cancel escrow and get all their deposit back before they actively lift contingencies in writing.

Once all contingencies are removed, it basically means that the buyer understands and accepts the property in its current condition and is going to close escrow.  At that point, the buyer’s deposit is theoretically at risk, and the seller might be entitled to keeping all or part of the deposit under the liquidated damages clause, if initialed.

Seller Cancellation

Essentially, the removal date can be thought of as a deadline for the buyer to submit the contingency removal form. If the buyer fails to submit by the date outlined in the contract, then it is up to the seller to take steps to demand the buyer to perform. If the seller does not demand performance, the contingencies stay in place, and it is not uncommon for many listing agents to neglect this step.

Typically, under the terms of the agreement, the seller cannot cancel until the contingency period has expired and a Notice to Buyer to Perform (CAR Form NBP) has been delivered to the buyer at least 2 days (to be specified in the NBP, but no less than 2 days) prior to the cancellation by the seller. If a seller decides they want to cancel but have not yet delivered the notice, a seller must add on the days specified in the NBP before cancellation is possible. The buyer then will have an opportunity to lift contingencies prior to seller’s cancellation.