Real Estate Contracts in New Jersey

Freedom of contract is still a principle of English law. Parties are free to make their own bargains, and the courts will enforce them.

Photo Production Ltd. v. Securicor Transport Ltd. [1980] A.C. 827

Real estate contracts in New Jersey establish the rights and obligations of the buyer and seller. These contracts, often referred to as the purchase and sale agreement, are the foundation of the transaction.

Contract drafting in real estate transactions is critical. Errors or mistakes are not easily changed after contract signing. Missteps can cost you time, money, losing the deal, and expose legal liability.

This blog is an overview of the core contract provisions in real estate contracts in New Jersey. We will review purchase price, financing terms, closing date, inspection and title contingencies, and disclosure obligations.

Purchase Price

The purchase price provision defines: (i) the amount the buyer will pay the seller, (ii) timing of payments, and (iii) method of transfer.

Besides total purchase price, the purchase price provision outlines the initial deposit, additional deposit, mortgage amounts, and the cash buyer will be required at closing. This serves as a roadmap of how money flows from buyer to seller.

Here is an example:

Earnest Deposits

Deposit—also known as an earnest deposit or good faith deposit—serves as the buyer’s initial demonstration of seriousness and commitment. This payment, usually ranging from 2.5% to 10% of the purchase price or roughly half the down payment, is due within 1 to 10 days after contract execution and is held in escrow by a neutral party like a title company, attorney, or licensed escrow agent.

Contrary to popular belief, deposits are typically not forfeited should a buyer fail to perform. Escrow holders are not judges and in most cases do not have authority to decide to give money to a party absent consent.

The deposit provision should clearly outline key deposit provisions such as amount, payment timeline, escrow holder, and release timing. Other portions of the contract will address specific contingencies for release.

Negotiating Deposit Terms: Legal and Strategic Considerations

Buyers and sellers have opposing goals when negotiating deposit terms.

Sellers prefer high and fast deposits to deter buyers that are not serious, whereas buyers seek smaller deposits to limit financial risk. While parties favor their own attorneys to hold deposits, I recommend title companies in New Jersey due to their security infrastructure and insurance protections.

Inspection Contingency

An inspection contingency is a provision in real estate contracts that allows buyers to cancel the contract with the return of any deposit monies following an inspection of physical conditions at the property. For commercial transactions this may also include due diligence on rent rolls, leases, service agreements, and other relevant information regarding the property.

The inspection period typically lasts 7 to 14 days for residential properties (and longer for commercial ones). During this time frame, the buyer conduct general and specialized inspections—ranging from radon tests and sewer scopes to oil tank searches and pest inspections.

Careful drafting of the inspection contingency is critical to ensuring fairness and clarity.

Buyers typically want broad inspection rights and the flexibility to cancel, while sellers prefer narrow scopes and timeframes to reduce risk and delay. Seller’s often retain rights to cure (through repairs or credits) and require buyers to produce professional inspection reports to justify renegotiations or terminations.

In the event Seller chooses to cure defects, Buyers mayp protect themselves by demanding licensed contractors for repairs, invoices showing payment, required permits, and reinspection rights before closing. These provisions protect both parties from disputes and help ensure the property is delivered as promised.

Mortgage Contingency

The mortgage contingency protect buyers from financial liability if they are unable to secure financing. This contract provision allows the buyer to cancel the agreement and recover their deposit if they fail to obtain a mortgage within specified terms and deadlines.

Terms of a mortgage contingency include the type of loan (e.g., conventional, FHA, VA, hard money), the loan-to-value ratio or down payment, and application and commitment timelines. These terms not only protect the buyer, but also allow the seller a right to cancel if the buyer is unable to confirm his ability to finance the sale.

Well-drafted mortgage contingencies should include protective mechanisms for both parties.

Buyers should ensure the clause allows termination if financing is denied for reasons beyond their control—even after receiving a mortgage commitment. Sellers, meanwhile, should require a formal denial letter that matches the loan terms stated in the contract and confirm that commitment letters are not overly conditional. In commercial transactions, buyers often include discretion-based clauses to cancel if terms are commercially unreasonable.

Closing Costs and Prorations

Real estate contracts often define which closing costs are paid by the buyer, which are paid by the seller, and which are divided between the parties. This clarity helps avoid disputes and ensures a smoother closing. Common seller costs include attorney fees, realtor commissions, and the New Jersey Realty Transfer Tax. Buyers typically pay for title services, their attorney, loan-related fees, and—if applicable—the 1% Mansion Tax on properties over $1,000,000. Buyers also often pay for surveys.

In addition to fixed costs, some items are prorated at closing based on the settlement date, such as real estate taxes, rent, utilities, and HOA fees. Fuel in tanks and prepaid items may also be adjusted.

See the chart below for a summary of typical closing cost responsibilities and prorations in New Jersey transactions.

Certificates of Occupancy

Certificates of occupancy (“CO”) are certificates required prior to the transfer of real estate ownership or new occupancy. Municipal inspectors visit the property and search for code violations, missing permits, and safety concerns. The local department either issues the certificate or a list of violations that must be resolved. Sellers normally are responsible to obtain the certificate.

Certificates of occupancy are often referred to as CO, certificate of code compliance, certificate of continued occupancy, and other local equivalents. The certificate is a legal requirement in most but not all New Jersey cities.

Contract provisions relating to certificate of occupancies should address the following:

• Responsibility. The party responsible for obtaining the certificate (buyer or seller) – most often the seller.
• Cost Limiation. A financial limitation on the cost of repairs on the responsible party. Once exceeded, this can become a negotiation between the buyer and seller for cost sharing.
• Temporary Certificate. Whether a buyer must accept a temporary certificate of occupancy (also known as a “conditional”) with responsibility to cure issues following the closing. This is most often where an investor or contractor is a buyer.

A seller (and their real estate agent) should be proactive in obtaining the CO. Permits and code violations can take several weeks to resolve, resulting in serious closing delays negatively impacting both the buyer and seller.

Clear and Marketable Title Contingencies

A title “clear and marketable title contingnecy” requires the seller to deliver property free and clear of any claims of third-parties.

Investopedia defined clear title:

A clear title is a title without any type of lien or levy from creditors or other parties that would pose a question as to legal ownership. For example, an owner of a home with a clear title is the sole undisputed owner, and no other party can make any kind of legal claim to its ownership. A clear title is also called a “clean title,” a “just title,” an “absolute title,” and a “free and clear title.”

Clear Title: Definition and Importance in Real Estate

Minor exceptions such as public utility easements and government access are normal exceptions. Here is a list of of items that are title clouds:

Common Title Issues

Open Mortgage. A recorded mortgage or home equity line of credit that remains unsatisfied and must be paid off and discharged before closing. Court Judgments. Legal judgments against the seller from prior lawsuits, often resulting in liens that cloud title until resolved. Delinquent Taxes. Unpaid property or municipal taxes that result in a lien and must be cleared to ensure marketable title. Open Foreclosure. A pending or prior foreclosure action that remains unresolved and threatens the seller’s ability to transfer clear title.

Estate Issues. Title held in the name of a deceased person may require probate proceedings to authorize a legal sale. Notices of Settlement. Recorded notices by prior buyers indicating a pending contract or transaction that must be cleared or released. Open Foreclosure Lawsuit. A recorded lis pendens or foreclosure complaint indicating active litigation, requiring dismissal or resolution prior to closing. Mechanic’s Lien. A claim filed by contractors or material suppliers for unpaid work or supplies furnished to the property.

Unknown Heirs. Potential heirs of a deceased owner who have not formally waived rights may later assert ownership claims. Forgery Issues. Prior documents signed fraudulently or by unauthorized persons may invalidate a portion of the title chain. Boundary Dispute. Conflicting surveys, fence lines, or encroachments may cause legal uncertainty regarding property lines. Easement Conflict. Disputed or unrecorded access rights that affect the property’s use or value and may require legal clarification.

Risk of Loss Clause

Risk of loss clauses allow the buyer or seller to cancel the transaction if there is property damage exceeding a threshold amount of money to repair. Risk of loss clauses protect both the buyer and seller:

• Buyers should not be obligated o purchase property that has been materially altered through damage and repairs.
• Major damage will take significant time to repair delaying the closing – a concern to both buyer and sellers.
• Sellers need protection from risk of loss because they did not anticipate major repairs.
• Buyer may obtain a financial windfall due to upgrades to the building.

A well-drafted risk of loss clause includes:

• Financial Threshold. Often 5–10% of the purchase price—granting one or both parties the right to cancel if the damage exceeds that threshold.
• Options. Whether the seller must repair the damage, offer the buyer a credit, or transfer insurance proceeds or claims to the buyer.

Balancing Buyer and Seller Interests

Buyers may prefer credits to control the quality of repairs or avoid rushed, subpar workmanship. Alternatively, buyers may insist that sellers to reduce financial uncertainty. Though rarely invoked, risk of loss clauses become important in environmental disasters, building failure, and fire.

Use and Occupancy Agreements

A Use and Occupancy (U&O) Agreement is a temporary arrangement in which the seller remains in possession of the property after closing, often due to needing more time to relocate or to complete a back-to-back purchase. Rather than becoming a tenant, the seller is deemed a licensee—a distinction that prevents them from acquiring tenant rights. These agreements are typically used when sellers need to remain for a short duration to coordinate logistics, when buyers need to lock in a mortgage rate before expiration, or to simplify complex double closings. U&O agreements can also be limited in scope, such as allowing the seller to store belongings post-closing without occupying the property. While mutually beneficial, the agreement must be carefully drafted to prevent misunderstandings and protect both parties’ interests.

Key Legal and Financial Terms to Include

Critical elements in a U&O agreement include the duration (typically no more than 60 days for financed buyers), a security deposit (often 50% higher than expected holding costs to incentivize compliance), and a daily per diem fee to cover the buyer’s expenses like taxes, insurance, and mortgage interest. Other provisions should address property access, especially if the buyer needs to begin renovations, responsibility for damage (with distinctions between seller-caused damage and age-related system failures), and penalties for overstaying, which often include doubled per diem rates and reimbursement of buyer’s legal fees in case of an ejectment action. With clear terms and proper legal guidance, a U&O agreement can offer flexibility and financial certainty during a transitional phase of the sale.

New Construction Contracts: How They Differ from Standard Sales in New Jersey

When buying new construction in New Jersey, especially from developers like Lennar, Toll Brothers, or Pulte, buyers should be prepared for contract terms that are significantly more favorable to the builder than traditional resale transactions. One major difference lies in the handling of deposits—which are often designated as liquidated damages in new construction contracts. This means if the buyer cannot close, the builder typically keeps the deposit with little room for dispute. Unlike resale contracts where deposits are refundable under certain contingencies, developers usually enforce strict forfeiture provisions. Another concern is the lack of appraisal contingency. While resale contracts may allow buyers to renegotiate or exit if the appraisal is low, new construction contracts often require buyers to cover the shortfall out-of-pocket, regardless of valuation.

Mortgage, Inspection, and Certificate of Occupancy Concerns

Buyers should also note that mortgage contingencies in new construction are time-limited—usually requiring loan approval within 30 days of attorney review, even if closing is months or years away. If financing falls through later, the deposit may still be lost. Inspections are delayed until construction is nearly complete, and developers often restrict who buyers can bring onsite. Although this can sometimes be negotiated to allow licensed inspectors, it’s not guaranteed. Moreover, builders typically reserve the right to complete repairs after closing, unlike resale deals where fixes are done beforehand. Buyers are instead protected by a 10-year home warranty, covering defects in workmanship for the first year. Finally, many developers require buyers to close with only a Temporary Certificate of Occupancy (TCO) rather than a final one, particularly if broader development work is still pending. While this can speed up closings, it also means some municipal issues may remain unresolved at the time of transfer.

Escalation Clauses: Competitive Edge in Hot Real Estate Markets

An escalation clause is a powerful tool in competitive real estate markets, allowing buyers to automatically increase their offer price in response to competing bids. This contract addendum states that if the seller receives a qualified competing offer—typically a signed offer with proof of funds and pre-approval—the buyer’s offer will rise in predetermined increments (e.g., $2,000 or $5,000) up to a maximum price. This clause can help buyers stay competitive without overcommitting upfront, while giving sellers confidence that they’ll secure the highest possible net sale proceeds. For buyer agents, it’s a strategic way to ensure their client’s offer remains in the running; for sellers and listing agents, it streamlines negotiations and eliminates time-consuming back-and-forth counteroffers.

Key Components and Negotiation Considerations

Drafting an effective escalation clause requires clarity on five key terms: (1) the qualifications of a competing offer that can trigger the escalation, (2) the increment amount by which the offer will increase, (3) a maximum purchase price cap, (4) whether the increased amount applies only to the purchase price or also to the mortgage amount, and (5) the treatment of appraisal contingencies—particularly whether the clause applies to the escalated price or the original offer. Additionally, buyers may wish to limit the number of allowed escalations to avoid being endlessly outbid. While sellers benefit from increased sale proceeds, buyers must carefully weigh how much risk and flexibility they’re willing to accept. A well-drafted escalation clause can be the difference between winning a home and losing out in a bidding war.

Abandoned Underground Oil Tanks

Yes, sellers in New Jersey can legally sell a home with an abandoned underground oil tank, provided it was properly decommissioned and documented according to local regulations. For some homeowners, leaving the tank in place offers savings in time, money, and stress—especially when the removal cost can range from $1,000 to a few thousand dollars. However, this approach comes with risks. If the tank is removed and contamination is discovered, it may trigger a reportable case with the New Jersey Department of Environmental Protection (NJDEP), resulting in potentially expensive remediation. Understandably, many sellers prefer to avoid that risk. But what seems like a cost-saving move upfront can backfire during the transaction process.

Why Removing the Tank Often Makes More Sense

Despite the legality of selling with a properly abandoned tank, most deals fall apart during attorney review if the seller refuses to remove it. Buyers—especially end-users—are often reluctant to inherit even a properly abandoned tank due to the long-term liability concerns. In many cases, buyers walk away unless the seller agrees to remove it. As a result, sellers frequently end up either lowering their price for a developer or investor or removing the tank mid-deal to keep the sale alive. Additionally, some lenders may refuse financing or condition loan approval on tank removal, making it even harder to complete the transaction. For these reasons, sellers who proactively remove the tank tend to enjoy a broader buyer pool, stronger offers, and fewer legal or financing delays, ultimately resulting in a smoother sale and higher net proceeds.