If you are selling a piece of real estate and a buyer comes along with a less than desirable offer to purchase (after using all your skills in negotiating a better transaction), what would you do?
Would you decline the offer outright and hold out for a better offer, which might never come? Or would you settle for the mediocre offer to purchase, which might also never result in a sale, because you have no idea of the offeror's financial and credit status?
Well, fortunately you don't have to do either! By inserting a correctly drafted "kick-out" clause (also known as a 72 hour clause) into the contract of sale, you can have the best of both worlds. You can accept the offer on the table AND keep the back door open for a better offer for the property.
A well drafted kick-out clause gives the seller the flexibility of replacing the first purchaser with another one, if a better offer comes along. But is important to understand that a "well drafted" kick-out clause, for the seller, is not a true "first right of refusal" clause.
A true first right of refusal clause would give the first buyer the right to simply meet or beat the terms of an offer from a competing buyer for the property, without having to prove that he/she will actually be able to complete the sale.
You (as seller) don't want to create any rights for the first buyer. You rather want to create the right for yourself to terminate the contract with the first buyer and move on to a better buyer. Or you want to (at least) encourage the first buyer to remove or fulfill all (or some) of the contingencies in the contract.
The basic kick-out clause
The kick-out clause provides that once the seller accepts a "back-up" offer to purchase and the seller gives the first buyer notice, the he/she has a specific period of time to take the appropriate action to avoid being "kicked out" of the sale.
Invoking the kick-out clause
A good kick-out clause specifies exactly what the seller must do to invoke the kick-out clause. Usually the seller has to accept a new offer. But the kick-out clause can also state that the seller can simply notify the purchaser of his/her intent to accept a new offer, without actually having to accept the second offer. And a bad kick-out clause (for the seller) might state that the seller must accept an offer of at least X% more.
Kick-out time limits
A kick-out clause allows for a specified period of time for the first buyer to prevent being kicked out. A good kick-out clause (from the seller's viewpoint) has a short notice period (72 hours or less) and starts counting down as soon as possible. And a "bad" clause has a long notice period, or a period of "kick-out amnesty" during wich the kick-out clause cannot be activated.
Kick-out notice
A seller's kick-out clause keeps the notice requirements as simple and easy to comply with as possible, while a buyer's kick-out clause will try to make it difficult for the seller to serve notice. The seller might want to give notice via SMS or telephone, while the buyer would typically want a written notice via snail mail, which gives him/her a little more time to perform to the terms of the contract.
Avoiding the kick-out
The seller's kick-out clause should state exactly what the purchaser must do if he/she wishes to avoid being "kicked out." These requirements can make all the difference to the both parties. The seller wants to make sure that the first purchaser will be able to complete the sale as soon as possible, while the buyer wants to buy some time to try and comply with the terms of the sales agreement.
The seller ideally wants the buyer to provide proof that the finances are available to conclude the sale and that all the buyer's contingencies have been fulfilled. The seller's second choice would be that the buyer waives all the buyer's contingencies in the contract. And last prize would be the waiving of only some of the buyer's contingencies.
Here it is important to notice that, although they may seem alike, the first and second options are very different. Waiving all the buyer's contingencies is not the same as fufilling all the buyer's contingencies.
Waiving all contingencies
If the buyer simply declares that he/she considers all the contingencies fulfilled, but he/she needs mortgage financing to complete the purchase, the sale might still fall through, but the seller is prevented from selling to the back-up purchaser. This is why it is very important to truly understand the language used in the kick-out clause.
Typically, in a contingent sale, if the purchaser fails to complete the transaction, the sales contract terminates and the purchaser's deposit is returned. The purchaser did not breach the contract, and therefore the seller cannot persue his/her breach of contract remedies.
But when the buyer waives all the contingencies to avoid being kicked out, the contract becomes non-contingent. Failure on the part of the buyer to perform to the contract would therefore constitute a breach of contract. The seller could therefore take steps to remedy the breach in accordance to the breach of contract provisions of the agreement, or cancel the agreement and withhold the deposit.
Sellers will usually be reluctant to sue the first purchaser for specific performance with a possible back-up buyer waiting in the wings to take over the sale. It is therefore very important to ensure that the deposit amount specified in the contract will be sufficient to satisfy the seller, if the kick-out clause allows the buyer to avoid being kicked out by waiving the contingencies.
To avoid any misunderstandings and disputes, the kick out-clause can also be drafted in such a way that the buyer authorises the release of the deposit to the seller as soon as he waives the contingencies in the contract.
Waiving some contingencies
When the kick-out clause allows the buyer to avoid a kick out by waiving some (not all) contingencies, the seller can be sadly dissapointed. For instance: a contract contains various contingencies, including a property inspection contingency, which the buyer waives to avoid being kicked out.
Now the seller cannot cancel the sale to transact with his/her back-up buyer. But the sale still ends up falling through, because the buyer did not qualify for a home loan.
In this case, the buyer is still protected from breach of contract remedies, because he/she is entitled to cancel the contract (without liability) according to the mortgage contingency. The buyer would be entitled to receive a refund of the deposit, leaving the seller disappointed, because he/she thought that there was a "sure" sale.
So, if you draft a kick-out clause that only requires some contingencies to be waived to avoid a kick out, be sure to consider the contingencies carefully and to specify all the contingencies that can cause the sale to cancel. - Better still, specify ALL the contingencies.
Wording the kick-out clause
A basic kick-out clause is relatively easy to draft, but different variations are possible. The terms can be adjusted to suit the needs of both parties, and as always in contracts of sale, the terms are limited only to your imagination and your supply of paper.
Don't allow your emotions to trick you out of your property sale, or a better purchase offer. Keep a level head and make sure that your interests are protected as best as possible.
Read more about drafting a kick-out clause and take care.
