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When a real estate deal starts to unravel, knowing ‘how’ a contract ends can be the difference between a clean exit and an expensive mess.
Sonia R. Downard, Vesta Settlements, LLC
Real estate contracts don’t always glide neatly to the closing table. Sometimes they hit a pothole, sometimes they lose a wheel, and sometimes everyone just agrees to pull over. When that happens, the smartest move isn’t to panic; it’s to pay attention to the process.
An important aspect of a real estate transaction is knowing how to terminate a contract properly. How a contract is terminated depends on the specific circumstances of the transaction, and there are three ways to terminate a contract: mutual consent, default, and void.
Mutual consent is when the parties agree to terminate the contract under whatever terms they determine to be acceptable through discussion and negotiation. This method allows the parties to reach a mutually acceptable solution to terminate the contract and is recommended when an unusual circumstance arises or in the event one party will not or cannot perform. For example, if the buyer no longer wants to purchase the property but no contingencies exist to allow the buyer to void the contract, the buyer and seller may negotiate acceptable terms to terminate the contract, such as forfeiting the earnest money deposit to the seller or some other mutually agreeable solution.
Contracts may also be terminated if one party defaults. Default occurs when one party either does something they are not supposed to do or fails to do something they are supposed to do. If one party defaults under the terms of the contract, the other party needs to send a notice of default to that party, clearly outlining the behavior or action that resulted in default. The defaulting party is the reason the settlement did not or will not occur, and they may have liability. It is important to remember that only a judge can determine if a default has occurred.
The final way to terminate a contract is for the contract to become void. This occurs when no party is at fault, and there is no default. Rather, one party is exercising its rights under the contract to terminate the contract based on a contingency stated and agreed to by the parties in the contract.
If the contract becomes void, a Notice Voiding Contract should be sent to the other party, along with the Release of Contract directing the earnest money deposit be returned to the buyer. Any Notice Voiding Contract should make it clear that the party intends to void the contract and include any documentation that is necessary to effectuate the contingency, such as a copy of the home inspection report if the buyer is voiding based on the home inspection contingency or a lender denial letter if voiding based on the financing contingency.
For example, pursuant to paragraph 26 of the Virginia Residential Sales Contract, it states, “If Contract becomes void and of no further force and effect, without Default by either party, both Parties will immediately execute a release directing that the Deposit, if any, be refunded in full to Buyer according to the terms of the Deposit paragraph.”
One important issue to remember is that if a party should sign the release due to the contract voiding based on a contingency but refuses to sign the release, it may move from a void situation to a default. If a court determines that a party should have signed the release but did not, they may be required to pay the other party’s attorneys’ fees to enforce the terms of the contract.
Whether a contract is terminated by mutual consent, default, or void, the terms of the contract determine whether or not the earnest money deposit can be released. The Deposit paragraph of the contract states that the earnest money deposit shall be held in escrow until: (1) it is credited towards the Sales Price at Settlements; (2) all Parties have agreed in writing as to the disposition of the Deposit; (3) a court orders disbursement and all appeals periods have expired; or (4) any other means authorized by law. A title company cannot release the earnest money deposit unless one of the listed options occurs, even if settlement does not happen.
Understanding the differences in how a contract may be terminated allows Corcoran McEnearney agents to advise and represent their clients and confidently work to resolve any contract termination issues that may arise.
Sonia R. Downard, Esq.
Counsel to Vesta Settlements, LLC
14399 Penrose Place, Suite 230
Chantilly, VA 20151
703-288-3333 | vestasettlements.com
Visit corcoranmce.com to search listings for sale in Washington, D.C., Maryland, Virginia, and West Virginia.
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