A ‘Kick-Out Clause’ Can Protect Home Sellers

By Sabrina Biehl Published Jul 15, 2015 02:26 pm

Question: We were about to sign a contract to sell our house to a very nice couple, when they advised us they cannot afford to buy our house unless they sell their house first. We would like to sell to this couple, but are reluctant to take our house off the market for an indefinite period while the buyers try to sell their house. How do you resolve this dilemma?

Answer: There is a concept in real estate called “the kick-out clause,” which may solve your concerns. No one likes to sign contracts which are contingent on the purchasers’ ability to sell their own house. Unfortunately, not everyone can afford to buy a new home until they sell their current property. And even if you can afford to carry the financial burden of two houses, many prospective home buyers still prefer to include a contingency in their contract to the effect that they do not have to purchase the new property until and unless their current home is not just under contract but actually is sold.

Generally speaking, when buyers present sellers an offer to purchase, they can include a contingency for the sale of their house. This is known as a “contingent contract.” In simple English, this means that if the specified event does not occur — in this case the buyers do not sell their house — then the contract to purchase the new property becomes null and void and the purchasers are entitled to a full refund of any earnest money deposit.

Needless to say, as you have suggested, sellers do not want to take their house off the market for an indefinite period.

Accordingly, a compromise has been developed, which is known as a “kick-out” clause. Under this arrangement, the contract provides that while the sellers are willing to accept a contingency contract, the sellers will continue to market the house. If another qualified buyer is found, the seller will give the current purchaser a certain amount of time — usually 72 hours — in which to remove the contingency (i.e., keep the contract alive) or exercise the contingency and decide not to purchase the new property.

This kick-out clause has to be carefully drafted. If the potential purchasers are confronted with the 72 hour kick-out period, and decide to delete (remove) the sale contingency, they may still be able to get out from under the original contract if they cannot get financing. Keep in mind that most standard sales contracts also contain another contingency on the ability of the purchaser to obtain the necessary financing.

This creates a dilemma for everyone. 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 the purchasers unless they sell their house first. Thus, the mere removal of the sale contingency does not meet the seller’s needs. The purchaser can still find an excuse to back out of the contract, based on another contingency in the contract.

Thus, sellers should include at the very least the following language in the 72 hour kick-out clause:

The parties agree that sellers’ property shall remain on the market during the above contingency period. If the purchaser does not remove the above contingency and provide evidence satisfactory to seller in their sole discretion of ability to perform under the terms herein within (a specific number of) hours after receipt of written notice that seller has accepted a secondary contract, purchaser’s deposit shall be promptly returned in full and the first contract automatically becomes null and void.