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Terminating Real Estate Contracts, When Is It Permissible?

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The Loan Contingency

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This is probably the second most often cited reason for terminating a contract; there is a lack of funding. Although most buyers have, and sellers ask to see, a pre-approved loan agreement from the buyer’s bank, some do not, and even if a buyer does have one, loan offers can fall through. If an agreement contains the provision that the buyer must be approved for a specific mortgage loan and interest rate, and they have not been, then they are allowed to terminate. Further, if the buyer cannot get an approved mortgage of the kind they need within the stated time period they can also terminate.  

Buyers who are facing this dilemma need to have a letter of refusal from the lender that shows that they took prompt action in good faith and despite that were turned down for the loan that they require. The buyer must also document that they let the seller know about this within the prescribed time period.

In this day and age of the Internet many people use email for such matters and this is fine, but it is also suggested that for a matter as serious as this that a registered letter be posted to the seller as final confirmation that the buyer has acted accordingly.

The Title and Survey Review Contingency

The second most mentioned reason for a termination of contract is that something was discovered to be improper with the title. If there are defects to the title that cannot be resolved it is well within the buyer’s right to want to cancel and back out of the agreement to look elsewhere.

If discrepancies are discovered when a property is surveyed a buyer may also back out. Many times a seller’s plot plan is not the same as a newer one, and an actual survey will reveal that a building or fence on adjoining property is encroaching on the seller’s lot, it is smaller than it originally appeared to be, or that possibly some other feature has moved due to erosion.

As with any contract, notification must be given within the prescribed time period for the request to be valid or considered.

The Review of a Seller's Disclosure Contingency

In some localities it is law, and in others it is just a good practice, to have a disclosure notice from the seller. In this document the seller lists any defects or problems with a property that would be of concern to a buyer. Bad roofing or foundations, a worn out furnace or possibly a dispute about the plot’s boundaries would all fall into this category. The contract will stipulate these items specifically and it will also stipulate a time period for the buyer to review and accept or reject the disclosure notice.

When a disclosure is given to a buyer after a contract has been signed the buyer will have a finite period in which to review the disclosure and agree to proceed or not. Buyers need to keep track of the time in all of these cases to avoid unwanted problems after the fact.

The Lead Paint Disclosure Contingency

In the past many older homes were decorated using lead based paints. If a home was built prior to 1978 the seller must disclose to the buyer any knowledge of lead based paints being used in the house. Buyers are given reasonable time to perform inspections and to then decide if they wish to continue with the purchase or back out.

Contingency for Sale of Other Property

If a buyer is not a first time homeowner they may have a property they must sell before purchasing the new one. If the closing on their current home is not performed within the date stipulated in the contract to buy then they will have good cause to terminate the offer. Sellers know and have assumed the risks involved with this type of contract and should in no way try to obstruct the termination of the contract offer should this unfortunately occur.

The above has been a simple guideline of what are considered to be the most basic and widely accepted reasons for a buyer to seek termination of a contract to buy. In no way does this brief article encompass all the different reasons that are either provided for by law or agreed upon by individual buyers and sellers across America. What is certain is that these contracts are integral to the process and must be well written and understood by both parties involved. If a buyer follows the stipulations laid out in the contract, and within the prescribed time frames, they are well within their rights to terminate. But if they do not adhere to the contingencies, or disregard the time element, the seller has all the right he needs to refuse a request for termination.

The Termination Process

If a termination is sought and agreed to then certain formalities must take place. The parties to the contract must fill out the requisite forms, which releases the parties from further obligations under the contract, and instructs the escrow company to give the deposit to one party or the other, and then earnest money must be returned to the buyer.

In the case where an agreement to terminate is disputed litigation is most often the next step and a prolonged legal battle will follow. Most often a seller will want to put their property back on the market and a quick settlement is best for them, but if a seller feels they have suffered some monetary damage they may fight to be reimbursed before terminating the contract. Until the contract is terminated they will most often not be able to list their home on the market.

Homebuyers are not known for entering into purchase contracts on a whim, but at times they will want to terminate and move on. Buyers must always be aware of all the contingencies and their expiration dates. If a contingency lapses they will then face problems and the protection they sought will have evaporated. Professional and experienced real estate agents, not only help buyers to find the home they are seeking, they can be very useful in helping the buyer meet their obligations under the contract and, if need be, exercise your right to terminate.

Disclaimer: This article is provided as a service to the public. Nothing in this article is intended to serve as legal advice, or as a substitute for legal advice tailored to your specific situation and jurisdiction. If you have a question about an issue discussed in this article, you should consult an attorney directly.

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