With the adoption of the most recent revisions to the standard Contingent Sale Addendum form recommended by the North Carolina Bar Association and the North Carolina Association of REALTORS®, it's time to take a fresh look at the subject.

By Blackwell M. Brogden, Jr., Chief Deputy Legal Counsel

When "Contingency Language" is necessary

Have you ever worked with buyers who wanted to make an offer to purchase residential property before their present home was sold? If you have experience in real estate sales, you have probably encountered this situation and know that it calls for "contingent sale" language to be made a part of the buyers' offer.

In the past, many licensees were disciplined for drafting their own "contingent sale" clauses in sales contracts. Often, these clauses were inadequate to address all the events which can occur when the buyers must sell their home before they can purchase another one. Even after the North Carolina Bar Association and the North Carolina Association of REALTORS® (NCAR) introduced a standardized Contingent Sale Addendum, some licensees continued to draft their own contingency forms. Serious problems can result from the improper use of such forms or the failure to use an appropriate form at all.

A number of common misconceptions can lead agents and parties into trouble; e.g., the belief that, "I don't need contingent sale language; I'm protected by the finance contingency." Also, problems result when licensees or parties to the transaction remove the contingency too soon, mistakenly assuming that the contingency can be removed as soon as the buyer's house goes under contract.

Various "Contingent Sale" Addenda

When dealing with a contingent sale, you should be familiar with the most recent Contingent Sale Addendum (Standard Form 2-A-2, copyright 1999), the Back-Up Contract Addendum (Standard Form 2-A-1, copyright 1999), and the Additional Provisions Addendum (Standard Form 2-A-11, copyright 1996). For the purpose of discussion, it is assumed that you are using the current Offer to Purchase and Contract form (copyright 1999) in conjunction with the addenda. You should also review Item (16) on the Guidelines for Completing the Offer to Purchase and Contract Form (Standard Form 2-G, copyright 1999) concerning the proper use of addenda.

All of the offer and contract forms and addenda described above are available from independent publishers/printers in North Carolina. REALTORS® may obtain these forms from a number of sources connected with NCAR.

Which addendum should you use? The Contingent Sale Addendum form is a detailed approach to the problem of the interested buyer who must sell a present home in order to comply with the purchase contract.

Suppose that your buyers use the Contingent Sale Addendum to make an offer contingent on the sale of their property. Note that the seller reserves the right under this Addendum to continue marketing the property. Assume further that the marketing attracts a new buyer, who makes an offer to purchase the subject property before your buyers' house is sold. It is at this point that the terms of the Contingent Sale Addendum become the most important: If the seller wants to accept the new buyer's offer, the seller is required under the Addendum to give your buyers written notice in order for them to be compelled to waive the addendum in writing or be forced out of the contract.

Upon receipt of the written notice, your buyers then have the designated number of hours from receipt of the notice to deliver to the seller a written waiver of their rights. If your buyers fail to deliver the written waiver in time, their contract is null and void and the seller is free to sell to the new buyer. Unless special circumstances exist, your buyers are entitled to the return of their earnest money.

Now assume that instead of walking away from the property, your buyers want to remain under contract to purchase it, even though their current house is not sold. In that case, your buyers must deliver the written waiver within the allotted time. Under the Contingent Sale Addendum, your buyers are now obligated to purchase the seller's house even if their house does not sell, and your buyers cannot use the loan contingency as an excuse for not performing their purchase contract with the seller.

What about using item (7) on the Additional Provisions Addendum form as an alternative? That provision is a much less detailed approach to the problem. It is designed to be used when the buyers have their present home under contract at the time of making the offer to purchase another home. Because it is less detailed, the seller has less protection in the event of a dispute. With the Additional Provisions Addendum, (unlike the Contingent Sale Addendum),the seller gives up the right to continue soliciting offers on the property. These are serious distinctions that a listing agent should discuss with a seller before accepting this term in a contract.

Some callers to the Commission mistakenly believe that when a buyer who is using the Contingent Sale Addendum places his or her existing home under contract, the parties must then sign Item (7) on the Additional Provisions Addendum. However, these addenda use different approaches to the "contingent sale" situation. Parties should choose one approach/addendum and follow it.

In the event of a conflict, both addendum forms claim to control the transaction rather than the terms of the underlying Offer to Purchase and Contract. As noted above, licensees should not use both forms in the course of one transaction. Neither form was designed for this purpose, and there is no provision that gives one form prevailing power over the other one.

Normally, the seller should not accept a subsequent offer until the first contract has been terminated; in a simple transaction, with all parties nearby and cooperative, the first contract may be terminated in a matter of hours or days. However, in transactions with complications that delay the process of notice and response between buyer and seller (e.g., distance separating the parties, lack of cooperation, personal problems including illness or court proceedings), removal of the contingency or contract termination can be delayed. In these more complicated transactions, the subsequent offer could then include the Back-Up Contract Addendum. This would give the seller some security that the subsequent offer would not be withdrawn after extensive efforts to cancel the first contract.

In Conclusion

If the seller or buyer finds the terms of a proposed offer or addendum to be unacceptable as written and desires modifications of the form, the licensee should refer that party to his or her own attorney. While these forms are designed for effective use in most residential transactions, there will always be parties or transactions for which the use of the forms will not be appropriate. Licensees should make every effort to ensure that they use recent forms that conform with all relevant state and federal laws.