In a hot seller’s market, some potential sellers may be unwilling to list their home for sale fearing they will be unable to purchase another home prior to close of escrow.  To alleviate this concern, some listing brokers have proposed inserting a seller contingency clause into the purchase contract that would make the sale contingent upon the seller finding suitable housing.  While the idea seems reasonable in the abstract, the details of such a clause open the door to legal challenges and bad actors.

For example, if the buyer must incur inspection and appraisal costs during the seller’s contingency period, the buyer will presumably be committed to purchasing the home.  The seller could then use this leverage to demand a higher purchase price, threatening to exercise the contingency if the buyer fails to concede.  In fact, in a hot seller’s market, the home may significantly appreciate during the seller’s contingency period inducing even honest sellers to require an increase in the purchase price of the home to complete the sale.

In such circumstances, it would be exceedingly difficult for the buyer to prove the seller was attempting to find suitable housing in good faith.  What is suitable housing?  Every home is unique and the seller’s subjective views on what they perceive as “suitable” housing include not only size, layout, and location but also cost and financing terms.  “Suitable” is inherently personal which not only makes it difficult to describe but also challenges the basic requisites of a contract.  A binding contract “must have mutuality of obligation, and an agreement which permits one party to withdraw at his pleasure is void.”  Big Bear Import Brokers, Inc. v. LAI Game Sales, Inc., 2010 WL 729208 (D. Ariz. 2010).  Is the seller really obligated to perform if they can unilaterally cancel because they cannot find a home they feel is “suitable”?

Alternatively, a seller contingency could be drafted more neutrally allowing both parties to cancel during the contingency period.  But if either party can cancel, are they really committed to the sale?  Is there much value in a purchase contract where both the buyer and the seller view and make offers on other properties hoping the buyer fails and the seller succeeds in order for their transaction to close?  In short, the parties may be better served to conduct their home searches first and only enter into purchase contracts to which they are committed.

Another possibility is to suspend the buyer’s inspection obligations until the seller contingency has been removed.  This would defer any out of pocket expenses of the buyer.  The downside to this term is that the seller is now a less attractive buyer when making their own offer to purchase.  In a hot seller’s market, a buyer contingency addendum with an extended close of escrow timeframe is unattractive and probably negates any benefit for the seller to be under contract.

Another issue concerns the seller’s obligations under the listing agreement.  If the seller exercises their contingency, is the listing agent still owed compensation?  On one hand, the listing agent produced a ready, willing, and able buyer at the list price.  On the other hand, the seller acted within their legal rights and should not have to incur a cost for doing so.  This may be especially true if the seller would not have listed their home for sale in the first place unless they were able to find suitable substitute housing.  Best practice would be for the listing broker to include an exclusion in the listing agreement clarifying that no compensation is owed if the seller lawfully cancels a purchase contract in such circumstances.

In short, trying to alleviate the seller’s concerns with a contingency for their benefit may cause more problems than it solves.  A listing agent may incur costs, produce a buyer, and still not be paid.  A buyer may be coerced to pay a higher sales price than negotiated.  And a seller may be an unattractive buyer unable to secure the suitable housing they seek.

Note: The Arizona REALTORS® has not drafted a Seller Contingency to Find Suitable Housing clause.

Aaron M. Green, Esq., a licensed Arizona attorney, is the General Counsel for the Arizona Association of REALTORS®.  This article is of a general nature and reflects only the opinion of the author at the time it was drafted.  It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.