What Is A Backup Offer And How Does It Work?
A backup offer is a legally binding Sale and Purchase Agreement signed by a buyer and vendor that sits in second position while a primary conditional contract is active. If the first buyer’s contract falls through or fails to confirm its conditions by the due date, the backup offer automatically becomes the primary operative contract.
How it Works
The process is strictly regulated under the Real Estate Authority (REA) guidelines:
- The Agreement: You submit a standard ADLS/REINZ Sale and Purchase Agreement with a specific “Backup Clause” added by your salesperson or solicitor.
- Legally Binding: Once the vendor accepts and signs it, you are legally committed. You cannot simply walk away or put offers on other houses unless your backup clause explicitly allows it.
- No Notification Obligation: According to REA Guidelines, the real estate agent is not obligated to tell the primary buyer that a backup offer exists, as doing so might disadvantage the vendor during conditional negotiations.
The Two Activation Scenarios
How your offer behaves depends entirely on the clauses written into the first buyer’s contract:
Scenario 1: Standard Conditional Contract (No Cash-Out Clause)
Your offer waits “in the wings”. If the primary buyer cannot satisfy their conditions (e.g., finance, Land Information Memorandum (LIM), or building report) within their agreed working days, their contract cancels. Your contract immediately steps into first position.
Scenario 2: The Contract Includes a “Cash-Out” Clause
If the first buyer’s offer is conditional on selling their own home, it often features a cash-out clause. When the vendor accepts your backup offer, it triggers this clause. The first buyer is given a strict notice period (typically 2 to 5 working days) to either declare their contract unconditional or walk away. If they cannot go unconditional, their deal collapses, and yours takes over.
Vital Clauses for Your Protection
Submitting an un-vetted backup offer can trap your capital and land you in legal trouble. Ensure your solicitor includes these protections:
- Postponed Condition Timelines: Ensure the working-day countdown for your own conditions (like a KiwiSaver first-home withdrawal, finance, or builder’s report) only starts from the date you receive written notice that the first contract has officially terminated. This stops you from spending thousands on building inspectors or legal fees for a house you might not get.
- Right of Termination (The “Escape” Clause): Include a clause that allows you to cancel your backup agreement by giving notice (e.g., 3 working days) if you find another house while waiting.
- No Extension Clause: A rule preventing the vendor from granting the primary buyer extra time to satisfy their conditions without your written consent.
Pros and Cons for Buyers
- Pros: You secure the property at a fixed price without facing future multi-offer bidding wars or auctions if the first deal fails.
- Cons: It can create an uncertain waiting period. If you do not have an escape clause, you are locked out of buying other properties on the market.
Prepare to Impress
If you would like to know more about the benefits and how it could apply to your home, We’re happy to take your call and provide more insights.
Our Motto is Under-Promise Over-Deliver
Successful in All Types of Market and Range
Repeat and Referral Buisiness are a Testament
Send Geraldine a Message
Your Details: