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The Role of Contingency Clauses in Real Estate Contracts

By Peterson Law Group on December 1, 2025

In California real estate transactions, contingency clauses play a big role in shaping the deal. These clauses can make or break a transaction. They protect the parties involved and determine whether a buyer or seller can legally back out of the agreement without penalty.

If you’re negotiating a purchase agreement, it’s essential to understand how real estate contingency clauses work, what they mean for your rights and obligations, and what to do in the event of a dispute or contract termination.

John Peterson, the Los Angeles real estate attorney at Peterson Law Group PC, has decades of experience advising clients in real estate litigation and transactional matters throughout California. Our legal team has successfully represented property owners, developers, investors, and commercial tenants in complex real estate disputes.

What Are Contingency Clauses in Real Estate Contracts?

A contingency clause is a specific condition written into a real estate contract that must be met for the transaction to move forward. If the condition is not satisfied, the party protected by the clause (usually the buyer) may cancel the contract without penalty or renegotiate its terms.

These transaction contingencies are standard in California purchase agreements, serving as  safeguards that allow parties to assess risk and due diligence obligations before committing fully.

Common Types of Real Estate Contingency Clauses

Financing Contingency

A financing contingency clause allows the buyer to back out of the contract if they are unable to secure a mortgage or loan approval by a specific date. If the financing falls through, the buyer can walk away with their earnest money deposit intact.

Appraisal Contingency

An appraisal contingency clause protects the buyer if the property is appraised for less than the purchase price. This allows the buyer to renegotiate or cancel the contract if the lender won’t approve the loan based on the appraised value.

Inspection Contingency

An inspection contingency clause gives the buyer a chance to have the property professionally inspected. If significant defects or safety issues are found, the buyer may request repairs, credits, or cancel the deal.

Title Contingency

A title contingency clause ensures that the seller can provide clear title to the property. If any clouds are discovered on the title, such as liens, easements, or ownership disputes, the buyer can terminate the contract unless the issue is resolved.

Home Sale Contingency

A homes sale contingency clause allows a buyer to make the purchase contingent on the sale of their current home. It’s a useful safeguard for buyers who need funds from their existing property to move forward.

Seller Contingencies

While most clauses protect buyers, seller obligations can also be contingent; for example, on finding a replacement property. These causes are less common, but they must be clearly  negotiated.

How Contingency Clauses Protect Buyers

For buyers, real estate contingency clauses serve as essential tools to minimize risk. They allow a buyer to conduct due diligence, secure financing, and assess the property’s condition before finalizing a purchase.

If a contingency clause is not met:

• The buyer can terminate the contract without penalty
• The buyer may recover their deposit
• The buyer retains leverage to negotiate repairs, credits, or price reductions

In hot markets, buyers sometimes waive contingencies to make their offer more attractive. However, waiving these protections exposes the buyer to significant financial and legal risks. A misstep could lead to losing a deposit, or facing litigation for breach of contract.

How Contingency Clauses Affect Sellers

While contingencies often favor buyers, they also set clear seller obligations. For example, sellers must:

• Cooperate with inspections
• Disclose known defects
• Address title issues
• Adhere to contractual timelines

Contingency periods can delay closing or introduce uncertainty, but they also create clear expectations for seller performance. Failure to satisfy these contract conditions may allow the buyer to cancel the transaction or seek legal remedies.

For sellers, understanding which contingencies are negotiable and how to enforce time limits is critical. Accepting an offer with too many contingencies or vague language can leave the seller vulnerable to contract cancellation or disputes.

Timeframes and Deadlines

Most real estate contingency clauses come with deadlines. These deadlines define the period in which the buyer must satisfy the condition or cancel the agreement.

If the contingency is not removed by the agreed date, the contract may automatically proceed to the next stage, or it may be deemed breached.

Key Deadlines to Watch:

• Loan approval date
• Inspection deadline
• Title review deadline
• Contingency removal deadline

Removing Contingencies in California

In California, contingencies are typically removed in writing using a Contingency Removal form. Once a contingency is formally removed, the buyer is bound to proceed, or they risk being in breach of contract.

There are two types of removal:

1. Active Removal – the buyer signs a form removing the contingency.
2. Passive Removal – the contingency period expires without action, and the clause is considered waived.

Legal Implications of Breaching or Failing Contingency Clauses

When a contingency clause is not met and a party fails to act appropriately, it can trigger significant legal implications, including:

• Breach of Contract: If a buyer fails to remove contingencies and refuses to close, the seller may sue for damages or force specific performance (i.e., make the buyer complete the sale).
• Deposit Disputes: Disagreements over who keeps the earnest money deposit are common in failed transactions. Properly documented contingencies can protect buyers from forfeiting funds.
• Title Litigation: If a property closes without resolving a title contingency, future lawsuits may result over ownership or encumbrance disputes.
• Disclosure Failures: If sellers misrepresent or fail to disclose known property issues, they may be liable for fraud or misrepresentation, even if the buyer waived inspection.

Tips for Buyers and Sellers: Managing Contingencies Successfully

For Buyers

• Never waive key contingencies (like inspection or title) without consulting legal counsel.
• Track deadlines carefully and communicate early about any issues.
• Get everything in writing, especially extensions or changes to conditions.

For Sellers

• Be cautious of offers with extensive contingencies or vague language.
• Push for short contingency periods to limit delays.

How an Attorney Can Help

Real estate contracts are legally binding, and contingency clauses are often the first area of confusion or contention in a transaction. An experienced real estate attorney can help by:

• Drafting and reviewing contingency language
• Enforcing or disputing contract conditions
• Negotiating timeline extensions or modifications
• Representing clients in mediation, arbitration, or litigation

Speak With an Experienced Real Estate Lawyer in Los Angeles

If you’re entering into a purchase agreement, dealing with a breach, or need guidance on buyer protections, seller obligations, or contract conditions, John Peterson is here to help. He is often called upon as authority in California real estate law, and he has been recognized by Best Lawyers and the Multi-Million Dollar Advocates Forum.

Call Peterson Law Group PC at (213) 319-4993 to learn more today.