What is a Kick-Out Clause?

A kick-out clause is a clause in a contract for a real estate sale which sets up a contingency which, when triggers, causes the contract to either lapse or be made good. If the buyer cannot meet the contingency, the contract will lapse, and the seller will move on to another buyer. If the buyer is able to meet the contingency, the contract is exercised and the sale moves forward. There are several settings in which a kick-out clause may be used, and it may not be the only contingency attached to the contract, depending on how the contract is structured.

In the classic example of how a kick-out clause might be used, a buyer might put a home under contract with a contingency stating that his or her own home must sell before the purchase can go through. This may be used in markets where real estate prices are high and people cannot afford to buy a new home without selling their original home. For the seller, however, this poses an obvious problem, because sellers do not want to sit around waiting for the buyer's house to sell for the sale to go through.

With a kick-out clause, the seller agrees to the contingency with the understanding that the home will continue to be marketed. If the seller gets another offer for the house, the buyer might be given a period of time such as 72 hours in which to respond. The buyer can either agree to move forward with the sale or allow the contract to lapse and lose the house. This provides flexibility for the seller, allowing the seller to get a good offer under contract while continuing to market the house in case a better offer comes up.

Putting a house under contract with a kick-out clause can be beneficial for buyers because it means that they have a contract set up and ready to go when their own homes sell. This can reduce the risk of ending up in a situation in which the house is sold but no replacement is under contract, forcing a stay in a rental or hotel until a home becomes available for purchase.

A real estate agent can add a kick-out clause to a contract along with other contingencies. Another common contingency is that the sale must be contingent upon financing. This ensures that the buyer is not forced to follow through on the contract even if the financing is not available. Likewise, people may reserve the right to back out of a contract or renegotiate it if real estate inspections reveal fundamental flaws with the home or property.