What is a Cash Out Clause?

24 January, 2018 | Jennifer Edwards

A “cash out” or “escape clause” is inserted in an agreement for sale and purchase to enable the vendor to give notice to the purchaser that they have another signed contract, this second contract is called a back-up contract.

When notice is given to the first purchaser they then have a required amount of days (usually 3 or 5 working days) to declare the contract unconditional or it will be cancelled after the expiry of the time period.

An example of an escape clause is:

“If before this agreement becomes unconditional the vendor receives an unconditional offer from a third party to purchase the property, then the vendor may serve on the purchaser a notice requiring the purchaser to advise within 3 working days after service of the notice whether all conditions for the benefit of the purchaser have been satisfied or waived and the agreement is unconditional in all respects. If the purchaser does not notify the vendor within 3 working days this agreement is terminated and at an end and the deposit shall be refunded to the purchaser.”

Cash out clauses when you are selling

If you are selling and the purchaser requires long condition times, for example they need to sell their existing home first, we recommend an escape clause (cash out clause) be inserted into the agreement.

If you accept a back-up offer you can give the first purchaser notice to go unconditional without having to wait until the conditions are due under the first contract, which could be some time.

However, we do not recommend giving notice to the first purchaser under the escape clause unless your back-up offer is unconditional in all respects. This will ensure that you will sell to at least one of the purchasing parties.

Cash out clauses when you are the purchaser

If you are purchasing and your vendor wants to insert an escape clause into the contract we recommend having the time frame for you to have to declare the contract unconditional under the clause as long as possible.

Usually the standard time period is 3 working days, if the vendor agrees it would be better for it to be between 5 – 7 working days. This will give you longer to satisfy the conditions you have remaining, or you are trying to sell it will give you time to look into bridging finance or find a buyer.

Have your lawyer check the drafting of the escape clause if you agree to have one inserted into an agreement. The lawyer should ensure that the drafting gives you the longest possible time for satisfying the condition, i.e. the vendor can only give notice if the back up agreement is unconditional and make it 5 – 7 working days rather than 3.

Are you selling and need a cash out clause added to your Sale & Purchase Agreement? Or is there a cash out clause in the agreement for the house you wish to buy? Give property conveyancing expert Jennifer Edwards a call today to make sure the cash out clause works for you. Phone: 09 837 6889 Email: jennifer.edwards@smithpartners.co.nz