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“Kick Out” Clauses a Valuable Tool in Real Estate Contracts

Often in real estate transactions, a home seller will be approached by a potential buyer who is offering a fair purchase price, but still has a house to sell. In these cases, the seller has to decide whether to sign a contract for the sale of the seller's house contingent upon the buyer selling the buyer's house. In most cases, the buyer will ask for some period of time such, as 30, 60 or even 90 days, in which to sell the buyer's house. The risk to the seller is that if the buyer does not sell the house within that time frame, the buyer will have right to cancel the contract and receive back the deposit. This could leave the seller without any sale in such event, and the seller would have to re-list the house for sale and look for another buyer.

In these cases, the seller's attorney or real estate agent may propose a solution to this, called a "kick out" clause. What is a "kick out" clause and how does it work?

A kick out clause is called that because it allows a seller to continue showing the house for sale and to "kick out" the buyer if the seller receives an offer from another buyer without a home sale contingency.

Generally, this is how a kick out clause works. The buyer can only buy the seller's house if the buyer obtains a contract for the sale of the buyer's house and can close title on that house. The buyer asks the seller for a period of time in which to enter into a contract for the sale of the buyer's house. This is called the "home sale contingency period." Depending on the market conditions, the period of time can range from 30 to 90 days. If the buyer can sell their house during that time frame, buyer will close title on the seller's house. However, during the time that the buyer does not have a contract for the sale of the buyer's house, the seller can still continue to show the seller's house for sale. In this way, the seller is not hurt if the buyer never sells their house.

If the seller receives an offer from another buyer, the seller must then notify the first buyer of the offer by the second buyer. Usually this is done through the attorneys. The notice to the first buyer must be in writing and will allow the first buyer a period of time in which to decide how the first buyer will proceed.

The most common time period allowed the first buyer to respond is 72 hours. However, my experience has convinced me that 72 hours is not always practical. For example, when do you begin counting the 72 hours? What happens if the 72 hours expires over a weekend or a legal holiday? Rather than use 72 hours, I prefer to give the buyer until 4:00 PM on the third business day after the notice is given. This allows for a definite time frame so that all parties know when the buyer must make a decision and notify the seller.

Once the buyer receives the notice of the second offer, the buyer must decide whether the buyer will proceed to purchase the seller's house without selling their own house (which is unlikely), or whether to cancel the contract and allow the seller to enter into a contract with the second buyer.

If the first buyer decides to continue with the purchase, the closing of title usually occurs within 45 days of the buyer's decision to proceed. On the other hand, if the first buyer decides not to proceed because the first buyer has not sold their house, the contract between the seller and the first buyer is canceled and the seller will enter a contract with the second buyer. In most cases, if the contract is cancelled, the first buyer will receive back their deposit money.

If, during the time of the home sale contingency, the first buyer sells their house, the contract between the seller and buyer becomes firm and the seller no longer will continue to market the house.

The kick out clause has advantages to both sides. It allows a buyer to find a house and put in under contract while the buyer tries to sell their house. It also allows the seller to continue showing the house to other buyers as a hedge against the first buyer not being able to sell their house.

Although the kick out clause has advantages to both sides, there are some drawbacks. If the seller receives an offer from a second buyer, it may take as long as five to seven days before the seller will know for sure that the first contract is cancelled. The second buyer may not be willing to wait for that time to pass and may look to find another house without a home sale contingency. This may limit the seller's ability to find second buyers.

The kick out clause is a useful tool in selling and buying houses in situations where a buyer has a house to sell and the seller does not want to tie up their house waiting for the buyer to obtain a sale.