Passive Vs. Active Contingency Removal

 

A contingency is something that a party to the contract holds as a way to get out of the contract. The most common would be inspection, financing and appraisal contingencies for the Buyer. The “standard” method of how contingencies are officially removed has changed quite a bit over the years. There are two main ways- passive and active.

Passive contingency removal means that when the deadline comes and goes and the party in question has not canceled the agreement, by default they have removed their contingency. That is why it is called ” passive.” If you do nothing, you are deemed to have removed your contingency.

Active contingency removal means that when deadline passes, if the party in questions has not removed their contingency, they still retain it. For example, if the contract gives the Buyer 17 days to remove their inspection contingency, and on the 18th days the Buyer has not removed their contingency, the still have that contingency in place. The Seller at that point can give the Buyer a notice to Perform or Quit, but the Seller can’t just declare the Buyer in default of force them to close escrow or try to retain their deposit.

Years ago, the California Association of Realtors (CAR) used the passive method in our contract, but then they lost a couple of lawsuits where the Buyer claimed the passive method didn’t give them enough time if the first inspector recommended more inspections. So now our standard CAR contract does use the active method. However, most bank-owned properties come with and addendum from the bank that converts it back to passive method. So if you are a buyer, you need to ask your agent which method of contingency removal applies. If it’s passive, you need to REALLY watch your deadlines.

Have a question in your contract? Please give me a call or email:
jchen@referralrealty.com

“Information provided by Referral Realty*

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