QUESTION: The real estate market appears to be getting better, and we have just signed a contract to sell our house in Maryland. However, our potential buyers want us to make the contract contingent on the selling of their house. We are anxious to sell so that we can move to a new location. We have heard about a concept called the "backup contract," but do not really understand how this works. Can you help?
ANSWER: If you are a purchaser, it certainly makes sense to have your contract completely contingent on your ability to sell your own house first. Purchasers want to have no legal obligation to purchase your house until they have sold--or better yet, settled--on their own house. Under most contingencies, if the contingent sale does not occur, the contract is generally voidable at the option of the person for whom the contingency was created--in this case the purchaser.
In other words, if your purchasers do not sell their house, they can (in their sole discretion) decide to cancel the contract. However, they also can take the position that, because the contingency is at their option, they can remove it and go forward to purchase your property. The courts are divided on the question of whether a contingency benefits only the purchaser, or also can be used by the seller to declare the contract null and void.
Obviously, you do not want to get involved in litigation over this matter. I suggest that you consider a so-called "kick-out" clause whereby you, the seller, give the purchaser a period of time in which to remove the contingency, thereby going forward with the contract or cancelling it.
For example, if you find another potential buyer, you can tell your first purchaser to "fish or cut bait." The language you should use reads as follows:
This contract is contingent on the ability of the purchaser to enter into a binding contract to sell their present house located at -----. Settlement on this contract will take place on or about the same time that settlement is conducted on the sale of the purchaser's house. The purchaser agrees that, if the seller obtains a backup contract, the purchaser will have 72 hours in which to remove this contingency, or this contract shall be null and void and the deposit returned in full.
In my opinion, this is a fair and equitable resolution to your problem. Your purchasers have preserved their desire to sell their own house first, but you are reserving the right to try to find another buyer during the interim.
Don't be afraid to take backup contracts. After you have signed one legally binding contract to sell your house, you may find other purchasers who are willing to take a secondary position in the event that the primary contract fails. As we all know, there are many reasons for such a contract to fail.
For example, purchasers may be unable to obtain the necessary financing. Or, purchasers may find the house unsatisfactory after they have obtained a structural inspection (having already included a contingency for this inspection).
Thus, if another purchaser comes your way, you do not want to lose him or her. You have the right to enter into another contract, but make sure to add the following clause:
This contract will not become binding on the parties until the seller notifies the buyer in writing that the contract has been accepted. It is clearly understood that this is a backup contract, contingent on the voiding of an earlier contract to purchase.