Contingencies in a California Purchase Agreement

The main ones

The inspection contingency gives the buyer a period to investigate the condition of the property. Based on what they find, they can withdraw or renegotiate. It is the broadest protection in the agreement.

The loan contingency covers the buyer's financing. If the buyer cannot obtain the loan on the agreed terms within the period, they can withdraw.

The appraisal contingency addresses the property valuing below the purchase price. When that happens, the loan usually falls short of what the buyer needs.

The title contingency lets the buyer review the preliminary report and object to the exceptions in it. The preliminary report is the title company's list of what is recorded against the property, and the exceptions are the items it lists as not covered. This is the one most often skimmed, and the one that surfaces easements, encroachments and recorded restrictions.

Removal is a written act

Under the standard California residential form, contingencies do not simply lapse by silence. The buyer removes them in writing. Until the buyer delivers that removal, the contingency generally continues to apply, even after the date has passed.

What changes on the date is this. From then on the seller can serve a notice requiring the buyer to act. That notice starts a short period, after which the seller may cancel.

This sequence catches people out in both directions. Buyers assume they have lost a protection they still hold. Sellers assume the deal is unconditional when it is not.

Where the deposit is at risk

Once contingencies are removed, the buyer's deposit is broadly exposed if the buyer then declines to complete without a right to do so. That is the practical reason contingency removal deserves attention, rather than being treated as paperwork.

Disputes over deposits are their own category. They usually turn on the sequence of written notices, rather than on the merits of why the buyer withdrew.

Waiving them to win a bid

In a competitive market, buyers are encouraged to shorten or waive contingencies to make an offer more attractive. To waive one is to give it up. That is a real trade, and it is worth understanding as one.

Waive the inspection contingency and you accept the condition of the property, with no right to withdraw over what is found. Waive the loan contingency and the deposit is exposed if financing fails. Neither is irrational. Both should be a decision rather than a default.

The notice mechanics that decide deposits

Under the standard California residential form, contingencies remain in place until removed in writing. The date in the agreement does not remove them by itself.

What the date gives the seller is the right to serve a notice to buyer to perform. That notice requires the buyer to remove the contingency or complete the relevant step. It starts a short period. If the buyer does not act within it, the seller may cancel.

Almost every deposit dispute is decided by this sequence. Was the notice served, when, and in the correct form? And what did the buyer do next? Keeping the dated notices is more useful than remembering the conversation.

Which contingency protects what

Inspection: the physical condition of the property, and generally the broadest right to withdraw. Removing it accepts the condition as it is.

Loan: the buyer's financing on the agreed terms. Removing it while financing is uncertain puts the deposit at risk.

Appraisal: the property valuing at or above the purchase price. Where it appraises low, the shortfall usually has to be covered in cash or renegotiated.

Title: the preliminary report and its exceptions. This is the one most often removed without being read. It is where easements, encroachments, restrictions and unreleased interests surface.

Sale of the buyer's own property, where the agreement includes it. Sellers frequently resist this one in a competitive market.

Removing them deliberately

Before removing any contingency, answer two questions. What was it protecting you from, and has that risk actually been resolved? Removing the loan contingency because the lender sounded confident is not the same as removing it because the loan is approved.

Say a notice to perform arrives and the underlying issue is unresolved. That is the moment to take advice rather than the moment to sign. From removal onward, the deposit is generally exposed.

This article is general information about California law and is not legal advice for any specific situation. If you are dealing with this issue, the facts of your matter will change the analysis.