Window to the Law: Navigating a Contract Termination

Window to the Law: Navigating a Contract Termination - Transcript

Getting THAT text or phone call that a party wants to terminate a signed purchase agreement can be crushing. An unfortunate reality is that not all signed contracts reach the closing table.   This Window to the Law focuses on strategies and legal considerations to best navigate your clients through the unfortunate, and sometimes unavoidable, circumstance of a purchase agreement cancelation.

A purchase contract is a legally binding document that provides the parties with a roadmap to closing, however in real estate, there are often several exit strategies, in provisions that allow the buyer or seller to terminate before a certain deadline, due to a contingency, or during the attorney review period. Helping your client understand these and any restrictions can mean the difference of a client getting their escrow money back or avoiding a lawsuit.

Every contract has an implied duty of good faith and fair dealing which means parties must act honestly, cooperate with the other party, and not discourage or hinder the agreement’s completion.  Breaching this duty could jeopardize a party’s legal rights and could lead to unnecessary litigation. And as a fiduciary, an involved broker’s actions or inaction may be scrutinized when a contract is terminated. 

Depending on timing and circumstances, a disputed termination could lead a non-terminating party to seek legal recourse. Available remedies can include liquidated damages specified in contractual provisions, compensatory damages calculated by actual economic losses, or specific performance, sometimes available to non-terminating buyers, where a court requires the parties to complete the agreed upon transfer of property. 

Consider these best practices to minimize risks:

Advise your client about the importance of impending contingencies and deadlines. Communicate proactively to avoid inadvertently waiving a contingency. Avoid casual communications with other parties via text or email, and assure amendments are in writing signed by all parties to avoid doubts about enforceability. 

And finally, avoid the unauthorized practice of law.  While you may understand the terms of the agreement, your state law and Article 13 of the Code of Ethics prohibits the unauthorized practice of law.  Filling in state-approved forms with factual data is generally permitted, however use caution when interpreting or amending contract provisions.  And your state may have statutes governing specific procedures for effectuating a notice of termination or the disbursement of disputed escrow funds. Recommend legal counsel if questions arise to ensure your client’s legal interests are protected.

And when the dust settles, consider the termination’s after-effects on your representation agreements. Listing and buyer representation agreements should remain in effect, however following a cancelation, it’s best to affirm your client’s intentions on a path forward and their position in the market.

Thanks for watching this episode of Window to the Law.