Back-up Contracts: Short Rider, Lots of Questions
As a seller’s market persists throughout Florida, more buyers enter into back-up contracts. Although the back-up contract rider is short, a few questions regularly drive members to call Florida Realtors Legal Hotline.
ORLANDO, Fla. – As our inventory remains thin in Florida, buyers are using back-up contracts to reserve a back-up position in case an existing contract for sale and purchase falls through.
The most common rider parties use to create a back-up contract is the Florida Realtors/Florida Bar Rider W, Back-up Contract. That’s the form we’ll analyze for this article, along with its companion contracts, the Florida Realtors Florida Bar Residential Contract for Sale and Purchase and its “AS IS” counterpart.
What makes a contract a “back-up contract”?
The parties must add a back-up rider to the contract. It’s just a short paragraph, but that paragraph is what keeps the rest of the contract in back-up, non-effective status for now. The parties are always welcome to ask an attorney to draft their own back-up contract language, although most buyers we hear about are happy to use our form rider.
Deposit deadline/effective date
The most common question we get concerns the deposit deadline. When is the initial deposit due? To find the answer, you must review both the main contract and the rider.
The first page of the contract offers two options. “The initial deposit made payable and delivered to ‘Escrow Agent’ named below (CHECK ONE): [ ] (i) accompanies offer or [ ] (ii) is to be made within (if left blank, then 3) days after Effective Date.” Note that if the first box is checked, the buyer should make the initial deposit when the back-up offer is presented, since it “accompanies offer.”
If the second box is checked, you must figure out when the effective date is. Normally, you’d look to the bottom of the first page of the contract, where you find this definition. “The effective date of this Contract shall be the date when the last one of the Buyer and Seller has signed or initialed and delivered this offer or final counter-offer (‘Effective Date’).”
However, the Back-up Contract Rider W replaces this definition with its own, which provides that “The ‘Effective Date’ of this back-up contract shall be the date Seller delivers written notice of the termination of the prior executed contract.” Therefore, the initial deposit won’t be due if the seller never activates the back-up contract.
If the seller does activate the back-up contract by sending written notice, then the date the seller’s notice is delivered is the effective date. Therefore, when we combine the new definition of effective date with the deposit timeline, the initial deposit will be due days (if blank, then 3) days after seller’s notice is delivered.
Inspection period and other time periods
We’ve already established that the effective date is just a future possibility when this back-up rider is in place. Therefore, none of the contractual clocks are ticking. There’s not yet an inspection period, loan approval period, or countdown towards closing, since the contract is not yet effective.
That also means the buyer isn’t yet entitled to inspect the property, although some sellers may allow a back-up buyer to take or even conduct inspections early. Note that this would be at the seller’s discretion.
How long must the buyer wait?
Another common question is whether the buyer can cancel if they want out of the back-up contract. The short answer is yes, provided they do it while still in back-up status.
The last sentence of the back-up rider provides that “Buyer may terminate this back-up Contract by delivering written notice to the Seller prior to the date Seller delivers written notice of the termination of the prior executed Contract and Buyer shall be refunded the Deposit, if any Deposit(s) have been paid, thereby releasing Buyer and Seller from all further obligations under this Contract.”
This cancellation option may give buyers peace of mind if they continue their home search while the back-up contract is in place.
Other back-up riders
Please note: There are two other back-up riders in the Florida Realtors forms database. One is designed for use with the Florida Realtors form Contract for Residential Sale and Purchase (CRSP Rider E Back-up Contract; Kick-out Clause). The other is designed for use with the Vacant Land Contract (Rider A Back-up Contract).
There are subtle but important differences among all three of these riders, so it’s always good to remind your buyers and sellers to carefully read every word of the contract and attached riders to make sure they understand their rights and obligations. Encourage them to consult an attorney with any questions.
Joel Maxson is Associate General Counsel for Florida Realtors
Note: Advice deemed accurate on date of publication
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