What the Heck is a Kickout Clause?
In our fast-moving Northampton real estate market, buyers often find themselves with a dilemma. They are on the lookout for that perfect new home, but they can’t buy unless they sell their current home. In a seller’s market, that can make securing that new home rather difficult. A “contingency offer” could be made, where if the buyer’s house doesn’t sell, the buyer is not obligated to fulfill the purchase of the new home. Understandably, taking that chance is not an attractive situation to a seller. They could take their home off the market and make their plans, only to be disappointed if the buyer’s home sale doesn’t happen.
One way to make a contingency offer more attractive— (and in this market, as a buyer you want to make your bid as strong as possible!) — is including a kickout clause. The “kick-out clause” is when a seller stipulates in the sales contract that the he can keep marketing the house while the buyers try to sell their house. However, there are stipulations in the kick-out clause of your house contract, and obtaining the sale isn’t guaranteed. Here’s what you need to know about the so-called “kick-out clause.”
Kick-out clause tip #1: backing up a contract with your home’s sale
When buyers present an offer to purchase, they can include a contingency for the sale of their own home. This is known as a “contingent contract.” It means that if the specified event does not occur — in this case, the buyers do not sell their house — then the contract for the new property becomes null and void. The buyers are then entitled to a full refund of any earnest money deposit.
Since it’s probably not in the best interest of the seller to take a home off the market for an indefinite period, a compromise known as the “kick-out clause” may be used. This is when a seller adds a stipulation to the sales contract stating that the seller can continue to market the house while still under a contingent contract based on the prospective buyers selling their current house.
If another qualified buyer is found, the seller gives the initial buyers a certain amount of time — usually 48-72 hours — to either remove the contingency and keep the contract alive, or use the contingency to decide not to purchase the new property.
Kick-out clause tip #2: Draft language carefully
This kick-out clause has to be carefully drafted. If the prospective buyers decide to delete the sale contingency during the 72-hour kick-out period, they may still be able to get out of the original contract if they cannot get financing. Keep in mind that most standard sales contracts also contain another contingency based on the ability of the buyer to secure the necessary funds.
These contingencies create a dilemma for both parties. If the buyers remove the sale contingency but still have the financing contingency in the contract, it is likely that a lender will not give a binding loan commitment to them unless they sell their house first.
So the mere removal of the contingency might not meet the seller’s needs. The buyer may still find another contingency in the contract to back out of the sale.
When drafting a contract, be sure to cover these concerns. Consult an expert or lawyer for specific language advice.
A compromise for buyers and sellers
For sellers, the kick-out clause is an acceptable arrangement. Although the sellers have signed a contract, in effect they are keeping the house on the market. The sellers have the right to show it to other potential purchasers and take back-up contracts if possible.
The seller should also insist the buyer immediately begin to market their own property, whether it be through a real estate firm or on their own. Specific language should be included in the contract that if the buyer does not begin to market the property within a reasonable period of time—for example, five days—the seller has the right to void the contract and look for another buyer.
For buyers, the kick-out clause can be subject to abuse. The buyer might understand that a seller is reluctant to take the house off the market when the contract is subject to a selling contingency. On the other hand, if a seller obtains a higher price for the house from a third party, the seller has the ability to use the excuse that the initial buyer is not financially able to purchase, thereby giving the seller the right to sell to a third party. Since the buyer is entering into a contract based on a contingency, expect the seller to have more leverage during the selling process.