4.3 Listing and Sales Contracts and Contingencies
Key Takeaways
- Exclusive right to sell pays the listing broker no matter who sells; exclusive agency lets the owner sell commission-free.
- A contingency that genuinely fails permits lawful cancellation and deposit return, not breach.
- An appraisal gap forces the buyer to cover the shortfall in cash, renegotiate, or cancel under the contingency.
- An option is a present right to buy (unilateral); a right of first refusal only lets the holder match a future offer.
- Until contingencies clear, the purchase contract is executory and binding but not complete.
This section covers the two contracts a licensee touches most: the listing agreement (broker-seller) and the purchase contract (buyer-seller). The exam tests who earns the commission and how contingencies work.
Listing Agreements: Who Earns the Commission
| Listing type | Who may earn the commission | Owner can sell it themselves commission-free? |
|---|---|---|
| Exclusive right to sell | The listing broker, no matter who finds the buyer | No |
| Exclusive agency | The listing broker, unless the owner finds the buyer | Yes |
| Open listing | Whichever broker procures the buyer; none if owner sells | Yes |
| Net listing | Broker keeps anything above the seller's net | Prohibited in Connecticut under §20-328-6a |
Exam trap: Exclusive right to sell pays the broker even if the seller personally finds the buyer. Exclusive agency lets the owner escape the commission only by selling without any broker.
The Purchase (Sales) Contract
The purchase contract binds buyer and seller to the sale, naming price, parties, property, financing terms, closing date, and the contingencies that must clear. Until those conditions are satisfied, the contract is executory — fully binding but not yet complete.
Common Contingencies
- Financing contingency — the deal is contingent on the buyer obtaining a loan on stated terms.
- Inspection contingency — the buyer may cancel or renegotiate after a professional inspection.
- Appraisal contingency — protects the buyer if the property appraises below the contract price.
- Sale-of-buyer's-home contingency — the buyer must first sell an existing home.
- Title contingency — the seller must deliver marketable title.
A contingency that genuinely fails lets the protected party cancel lawfully and recover the earnest money — this is not a breach. A buyer who walks for a reason outside a valid contingency breaches.
The Appraisal Gap
When a property appraises below the contract price, the lender will lend only against the lower appraised value, creating an appraisal gap. The buyer's options:
- Pay the difference in cash (cover the gap),
- Renegotiate the price with the seller, or
- Cancel under the appraisal contingency and recover the deposit.
Worked example: Contract price is $400,000; the appraisal comes in at $380,000. With 20% down on the contract price, the buyer planned $80,000 down and a $320,000 loan. The lender now lends 80% of $380,000 = $304,000. The gap is $320,000 − $304,000 = $16,000 the buyer must add in cash (now $96,000 down) — or renegotiate, or cancel under the contingency.
Options and Rights of First Refusal
- An option gives the holder (optionee) a present, enforceable right to buy at a set price within a set time. The optionor must sell if the option is exercised; the optionee is not obligated to buy. It is a unilateral contract supported by option consideration.
- A right of first refusal (ROFR) is weaker: the holder may only match a future bona fide offer if and when the owner decides to sell. The owner is never forced to sell.
Exam trap: An option compels the owner to sell on demand; a ROFR only lets the holder match if the owner chooses to sell.
Earnest Money and Cancellation
Earnest money is held in trust pending the outcome of the contingencies. If a contingency lawfully fails, the deposit returns to the buyer. If the buyer defaults without a valid contingency, the deposit is typically forfeited to the seller (often as liquidated damages). The exam reliably tests the difference between a lawful contingency cancellation (deposit back, no breach) and a default (deposit forfeited, breach). When a question describes a buyer who could not obtain financing despite a good-faith effort under a financing contingency, the cancellation is lawful and the earnest money is returned.
Under an exclusive right to sell listing, the seller personally finds a buyer through a friend and the home sells. Who is owed the commission?
A buyer contracts to purchase at $400,000, but the appraisal comes in at $380,000 and the lender will only lend against the appraised value. Which is NOT one of the buyer's typical options under an appraisal contingency?
An owner grants a tenant the right to match any future bona fide offer the owner accepts, but the owner is never required to sell. What has been created?
Contingency Mechanics and Equitable Title
A contingency must state a standard, a method, and a deadline: what condition must be met, how it is judged, and by when. A vague "subject to financing" with no terms invites disputes.
Equitable Title
Once buyer and seller sign a valid purchase contract, the buyer gains equitable title even though legal title stays with the seller until closing. This is the doctrine of equitable conversion, and it explains why the buyer often bears risk of loss and benefits from appreciation during the executory period (subject to the contract's risk-of-loss terms).
Liquidated Damages in the Purchase Contract
Most form contracts state that if the buyer defaults, the seller may keep the earnest money as liquidated damages, often as the seller's sole remedy.
Exam trap: Between signing and closing, the buyer holds equitable title and the seller holds legal title; full legal title transfers only at closing by delivery of the deed.
Net Listings and the Safety Clause
Connecticut Regulation §20-328-6a expressly prohibits net listings. The underlying conflict is that the seller does not share in the upside and may not appreciate the size of the resulting fee.
A safety (protection) clause entitles the listing broker to a commission for a limited period after expiration if the property sells to a buyer the broker introduced during the listing, blocking sellers from waiting out the listing to dodge the fee.
Exam trap: A safety clause protects the broker against a buyer the broker procured, not against any buyer who appears after expiration.