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How to Terminate the Real Estate Contract

Aug 17, 2007
A real estate sale is usually initiated by an offer from the buyer to the seller, written on a real estate contract form, and backed by a monetary deposit. If the seller accepts the offer, the buyer and the seller are bound by a legally binding contract. While the forms vary by locality, the essential terms include the offer amount, legal description, names of the parties, and date of closing. In addition to these terms, the contract interweaves numerous contingencies, disclosures of information, and procedures that dictate responsibilities of buyer and seller. The contract is the road map that takes you all the way through to closing. It is very important to understand its terms and follow them carefully. If it becomes necessary to terminate the contract, your close adherence to contract terms and procedures is critical.

Loan Contingency

Your contract may contain a provision that the buyer must be approved for a specific mortgage loan and interest rate. If the mortgage cannot be obtained within the prescribed time, the buyer may terminate the contract and receive a refund of deposit. If it becomes necessary to terminate under this contingency, you should be prepared to document that you took prompt action to obtain the loan, received a written rejection, and gave notice to the seller within the time limit set by the contract.

Termination based on credit disapproval is likely to cause anger and disappointment on the part of the seller. The seller may feel that he has been misled into signing a contract with an unqualified buyer. When anger and strong emotions enter into the transaction they may lead to difficulty in resolving the termination.

Title and Survey Review

Contracts usually provide a title review period for the buyer. The buyer may object in writing to defects noted in the title documents. If title defects cannot be cured, you have the right to terminate.

In the same vein, the buyer usually has the right to review a survey of the property. If construction is found to overlap building lines, or if there are encroachments on the property, you may choose to terminate your contract.
It is worthwhile to promptly consult an attorney if you have some concerns about the title documents or survey. Your objection to title or survey problems must be made in writing within the time frame allowed by the contract.

Review of Seller's Disclosure

In Texas, sellers (with some exceptions) are required by law to provide a seller's disclosure notice to the buyer. On this form, the seller answers questions and provides information about the property. If the buyer receives the form after the contract has been created, he may terminate the contract within a certain number of days after receiving the seller's disclosure. The receipt date of the disclosure should be documented in order to establish the start date of the review period. Be careful to avoid confusion about when a time period starts running.

Mandatory HOA Review

In areas where there is a mandatory homeowners association, the Texas contract allows the buyer a period of time to review Subdivision Information. This information is normally supplied by the HOA manager after the contract is created. After receipt, the buyer has the right to review the documents, and possibly terminate the contract. Again, the termination notice must be given within the time limits in the contract.

Inspection Contingency

Contract procedures to allow the buyer to conduct inspections of the property vary from region to region. In some areas, the buyer may terminate if repairs exceed a pre-agreed dollar amount, and seller declines to make the additional repairs. In Texas, the buyer is allowed an "option period," during which time he has the unrestricted right to terminate the contract. Inspections are done within the option period.

Inspection issues are the most common reason for contract termination. During the inspection period, there is usually some re-negotiation of the price or terms in order to resolve repair issues that have been brought up by inspections. It is crucial to get inspections done, deliver repair requests, and negotiate contract amendments, or, if necessary, terminate the contract, all within the time guidelines set by the contract.

Contingency for Sale of Other Property

In some cases the buyer may have a contingency for the sale of a certain property, usually the buyer's current home. If this property does not close by a certain date, the buyer may have to terminate. As with other termination procedures, giving notice to the seller within the required time is critical. By allowing this type of contingency the seller has accepted the risk that the contract may not close.

Lead Paint Contingency

Federal law requires that sellers of homes built prior to 1978 notify the buyer of any knowledge or inspections that they may have regarding lead paint. The buyers are allowed a period of time to review materials and conduct their own inspections. If lead paint is found, the buyer may terminate the contract within the prescribed time frame.

Finalizing Termination

We have touched on the most common termination clauses in standard real estate contracts in Texas. Contracts used in other states, or provided by builders for new homes, or written by an attorney for a particular transaction will vary greatly in the contingencies and terminations clauses included. In addition, there may be ways to terminate your particular contract, other than through contingency clauses.

The important thing to remember is that the contract of sale is of primary importance to the real estate transaction. If you follow the terms of the contract and act within time limits, you may exercise the termination rights that the contract contains. If you fail to follow the terms, most contracts state that you have waived the right to terminate.

After you have given the seller notice of termination, two closely related steps must follow: The parties must formally terminate the contract, and the earnest money deposit must be released. If the buyer and seller agree to the termination, their agreement is usually formalized by signing a termination form. In Texas we have an "earnest money release" form that handles both steps - it releases the parties from further obligations under the contract, and instructs the escrow company to give the deposit to one party or the other. It is usually in the best interest of all parties to resolve the earnest money and contract termination issues as soon as possible.

If the buyer and seller cannot agree that the contract is terminated, the matter could lead to prolonged negotiation and possibly, litigation. In most cases, it is in the seller's best interest to have formal termination of the contract, freeing him to put the property back on the market. However, occasionally, even when it is clear that the buyer has followed contract procedures, the seller may prolong the formal termination process. The seller may want to receive compensation from the buyer for the delay in selling the property. Buyer and seller may have conflicting points of view of the issue. The non- settlement of termination issues can result in additional time and money, and cause unwanted stress.

Most buyers do not enter a real estate contract with the intention of terminating. However, buyers must not take for granted that all will go as expected. If a contingency date lapses, you will lose the benefit and protection of the contingency. A good Realtor, in addition to helping you find the property, can be invaluable in helping you to meet your obligations under the contract and, if necessary, 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.
About the Author
Roselind Hejl is a Realtor with Coldwell Banker United in Austin, Texas. Her website - http://www.weloveaustin.com - offers homes for sale, market trends, buyer and seller guides. Austin Texas Real Estate Guide
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