The Contingent Right to Purchase is a regular confusion point in a contract. As a baseline, if you are going to make a contract contingent on the Buyer selling their personal property before purchasing the Seller’s home, you should absolutely be using a contingent right to purchase form. Simply writing, “The transaction is contingent on the Buyer selling their house” in a general addendum or in the additional provisions is not going to be sufficient. Contracts are literal creatures, saying, “Transaction is contingent” just means, “xyz has to happen by closing or the deal is off.” This means, when you write, “The transaction is contingent on the Buyer selling their house” but nothing more, if the Buyer’s house sale falls through two weeks before closing, there’s nothing the parties can do until closing; termination rights are not granted by the language you wrote in the contract. A lot of lawyers and a lot of practitioners have worked on this problem for a long time and the Contingent Right to Purchase form is your way to create a meaningful, procedural, and methodical approach for these contingent right transactions.
To begin with: the Contingent Right to Purchase is used when a Buyer has to sell their property before closing on the Seller’s property, generally because the Buyer does not have available financing to purchase the Seller’s house without the liquid assets from the Buyer home sale. The “how safe is this Buyer offer financing” scale for Sellers usually goes:
(1) buyer has briefcase full of money with them presently and can buy the house outright,
(2) buyer has known bank offering mortgage to cover purchase price,
(3) buyer has money coming from *somewhere* or *somebody*?
(4) buyer doesn’t have enough money yet, but trust them, it’ll be here soon.
A contingent right to purchase sockets somewhere between step 3 and 4 of the above scale. Sellers regularly accept Buyer offers with contingent rights, but that acceptance comes with the implicit assumption that the Buyer financing is unstable. The concession that is given to Sellers to encourage these contingent rights is known as “bumpability” or “acceptance subject to contingency” or whatever your MLS defines the similar term as. In other words, the Seller says, “The Buyer is a little uncertain about where they’ll have the money, but I want to accept their offer. However, I still want to be able to do best for myself. Hence, let me keep looking for other buyers while I’m under contract with this current Buyer.” The Seller is allowed to keep advertising and accepting offers on the property despite being under contract with the Buyer. What then does the Buyer get out of the Contingent Right to Purchase? The Buyer gets an offer accepted despite not having liquid finances or secured financing. The Buyer also gets the ability to terminate the sale at any time by indicating that the transaction is not working out.
If the Seller wants to accept an offer from another Buyer, the Seller has to notify the original Buyer. The notice says, “Buyer, I got another offer that I’m going to accept. You have a small window of time to either drop the contingency and put us under contract or I can terminate our offer.” For lack of a better description, the Seller triggers the “fish or cut bait” provision. When the Buyer learns that the Seller has a better offer, the Buyer gets a day or so to respond, and in their response the Buyer can say one of three things: (1) I have an offer on my house, let’s get rid of the contingency and just be under contract; (2) I don’t need the contingency anyways, I have enough money elsewhere to handle the purchase; or (3) I can’t afford Seller’s property at the moment so I guess I have to terminate. If the Buyer doesn’t respond, the Seller can just terminate the transaction and go forward with the third-party buyer’s offer.
In practice it would look like this: the Buyer puts in offer for $500,000 with contingent right to purchase; Seller accepts. Seller advertises and after a few weeks gets an offer for $495,000 all-cash. Seller says, “Buyer, I got another offer, it’s all cash so I think it’s more likely to close because I haven’t heard anything about your property selling so I’m going to go with it if I can.” The Buyer responds within a few hours, “I have an offer on my property that has been accepted, I was hoping to wait until they got through inspections, but I want to purchase your house so I’ll drop my contingent right to purchase and hope my sale goes through.” The contingent right to purchase ends and now the Buyer and the Seller are in a transaction that is no longer contingent on the sale of Buyer’s house. If the Buyer’s house sale fails, Buyer and Seller need to work out the financing or terminate the transaction [consult Form 2.11, section 9 for the language on how they negotiate or terminate when the Buyer’s property sale fails].
Pay attention to your timelines in the Contingent Right to Purchase. In the Oregon REALTORS® Forms, the timelines continue as though you were under a normal contract unless the parties specify otherwise in a written addendum. If the Buyer doesn’t want to start doing inspections or reviewing the title report until after their personal property has an offer on it, or until after their personal property has sold, they need to specify that in writing. Our approach when drafting the Oregon REALTORS® Form Contingent Right to Purchase was: the contingent right to purchase is already a Seller taking on additional risk by accepting an offer from a buyer with uncertain financing; why then would the Seller also automatically take on timeline extensions to the Seller’s house closing based on a transaction that has no connection to the Seller? The default should be “the Seller sells the house as normal,” and timeframe extensions based on the Buyer’s closing or accepting offers should be something the Buyer requests rather than something the buyer expects.