You may have seen the phrase “kick-out clause” and wondered what it meant. As used in a real estate contract, it allows a Seller to accept a Purchaser’s contingent offer to purchase his/her property, while allowing the Seller to continue to market the property. The length of time can be for 24-, 48- or 72 (or more) hours depending upon what the Seller and Purchaser agree to.
If a Seller then receives another (better) offer to purchase the same property, he/she can also accept this offer as a back-up. The Seller can then activate the “kick-out clause” by notifying the original Purchaser about the back-up offer.
The first Purchaser now has the specified period of time to fulfill all the Purchaser contingencies in the contract of sale, or cancel the contract and lose the property. If the Purchaser cannot fulfill the contingencies in time, the original contract will cancel (or be ‘kicked out’ of contention) and the back-up offer will move into first position.
The term “kick-out” can be somewhat misleading, because the notice period within which the Purchaser must fulfill his/her contingencies can be negotiated. The effective notice period may therefore be longer or shorter than, for example, 72 hours. Further ambiguities can arise if the agreed upon time frame is only considered counted on business working days, excluding weekends and legal holidays.
Backing Up a Contract With Your Home’s Sale
Another example of when a “kick-out clause” can be used is if your house is on the market and you find a dream home for sale. You want to get that house as soon as possible, but you won’t have enough money for it until your home sells as you might be able to use own your house on the market as leverage in a contract with the Seller. However, there will be stipulations in this type of contract, and obtaining the sale isn’t guaranteed.
When Purchasers present an offer, 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 Purchasers do not sell their house — then the contract for the new property becomes null and void. The Purchasers 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 Purchasers selling their current house.
If another qualified Purchaser is found, the Seller gives the initial Purchasers a certain amount of time, which has been agreed to, to either remove the contingency and keep the contract alive, or use the contingency to decide not to purchase the new property.
Draft Language Carefully
This “kick-out clause” has to be carefully drafted. If the prospective Purchasers decide to delete the sale contingency during the 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 Purchasers 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 Purchaser 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 with your Solutions agent or lawyer for specific language advice.
A Compromise for Buyers and Sellers
For Sellers, the “kick-out clause” is an acceptable arrangement. Although they’ve 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 Purchaser 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 Purchaser doesn’t 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 Purchaser.
For Purchasers, the “kick-out clause” can be problematic. The Purchaser 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 Purchaser is not financially able to purchase, thereby giving the Seller the right to sell to a third party. Since the Purchaser is entering into a contract based on a contingency, expect the Seller to have more leverage during the selling process.
Be sure to contact your Solutions agent if you still have questions about the “kick-out clause” before you start writing a contract.