A kick-out clause gives sellers the ability to continue marketing a house in the event that they receive an offer with contingencies, or conditions that must be met. One of the most common contingencies is that the buyers must sell their current home. But a kick-out clause in the sales contract allows the seller to "kick out" a buyer with contingencies (after a certain time period) if a better offer comes around.
Read on to learn how this clause works and what to do if you see one in an agreement of sale.
What is a kick-out clause?
Let's say a seller has found some buyers, but the buyers are unable to purchase the house until their current home is sold. Since it’s not in the seller's best interest to take the home off the market for an indefinite period while waiting for the buyers to sell their home, a compromise known as the “kick-out clause” may be used. This clause says the seller can continue to market the house even under a contingent contract.
If another qualified buyer is found, the seller gives the initial buyers a certain amount of time—usually 72 hours—to either remove the contingency and keep the contract alive, or use the contingency to decide not to purchase the new property.
A compromise for buyers and sellers
For sellers, a kick-out clause is an acceptable arrangement because, although they have signed a contract, they remain able to keep the house on the market. They still have the right to show it to other potential purchasers and (depending on state laws and restrictions) potentially accept backup offers.
For buyers, a kick-out clause can make their offer look weaker than one without it. Sellers may not want to take the risk, especially if other offers have been made.
A seller who accepts an offer with a kick-out clause is likely to have more leverage during the home sale contingency period (the period during which the contingency must be met). For instance, a seller who gets a higher offer could use other contingencies—such as the financing contingency—as proof that the initial buyer is incapable of purchasing the property. When this happens, the original contract will be dissolved, leaving the seller free to negotiate with the person who made the higher offer.
Whether you're a buyer or a seller, make sure that you understand the specifics of a sales contract before signing on the dotted line. If your contract is to include a kick-out clause, Ben Kass of the Washington, D.C., law firm Kass, Mitek & Kass, PLLC, recommends that sellers remember to include that "satisfactory evidence" of the buyer's home sale should be provided and that buyers include a clause stating that their earnest money deposit will be returned in the event that the kick-out clause is invoked.
If need be, consult a real estate agent or lawyer for advice on specific language in your sales contract.