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A financing clause is a resolutive condition in an agreement: if the buyer fails to secure the necessary financing, he can terminate the purchase free of charge. It protects you against the situation where you buy but cannot secure the loan — commonly used when purchasing a home or shares.
What is a financing contingency?
A financing clause is a resolutive condition: the agreement is dissolved if the buyer fails to obtain (suitable) financing. This prevents you from being obliged to take delivery of a purchase while you are unable to pay for it. You can then withdraw from the purchase without liability for damages, provided the conditions are met.
Why is it useful?
If you are purchasing something for which you need external financing — a house, commercial property, or a block of shares — a loan rejection is a real risk. Without a financing contingency, you are bound to the purchase and risk a fine or compensation. With a financing contingency, you transfer that risk and buy safely.
Pay attention to the conditions
Invoking the financing clause will only succeed if you comply with the agreements. Often, there is a time limit within which you must arrange the financing, an obligation to make a serious effort to apply for it, and a documentation obligation: for example, you must be able to show one or more rejections from a lender. Adhere strictly to these, otherwise the protection will lapse.
Document it properly
An unclear financing clause leads to disputes and may still bind you to the purchase. Specify exactly under what conditions, within what timeframe, and with what evidence you can terminate the agreement. Have the clause carefully drafted, tailored to the transaction.
Frequently Asked Questions
What does a financing clause do?
It allows you to cancel the purchase free of charge if you are unable to secure financing, provided you meet the conditions.
When is an appeal successful?
If you adhere to the agreements: apply for financing in a timely and serious manner and be able to provide proof (such as rejections).
What is it often used for?
For the purchase of a home, commercial property, or shares, where external financing is required.
Want to properly arrange a financing clause?
Our legal experts incorporate a watertight financing clause into your purchase agreement. View our contract lawteam or schedule a free consultation.
