What is a Contract Cancellation Form in Real Estate?
A real estate contract cancellation form is a legal document that is utilized to terminate a real estate sales contract between a buyer and a seller, typically before the transfer of property ownership has occurred. It serves as a formal means of acknowledging that both parties mutually agree to end the transaction under the terms outlined in the cancellation form. The purpose of this form is to ensure that both the seller and the buyer are in accord that the sale will not proceed, allowing them both to either move on with another opportunity or simply part ways.
The real estate contract cancellation form typically contains key information such as the names of the buyer and seller, property details, contract terms, and reasons for cancellation. Sometimes these forms are also used to designate how any funds deposited in escrow will be disbursed, as well as if and when the buyer’s deposit is to be refunded back to them.
The cancellation form is an important aspect of the real estate transaction process because there are many circumstances that could lead a buyer and seller to cancel . For example, the buyer could have some type of inspection done that uncovers an issue with the property they just cannot accept or live with. Another example could be that a buyer’s financing falls through. There may also be instances where the seller finds that they have not been completely open about their property and are possibly being misleading about its condition or what they must be allowed to do to the property before a buyer would want to do so.
Despite whatever the case may be, the cancellation form represents an essential agreement between both the buyer and the seller to simply stop the transaction process. In most cases, the form is created and signed during the Option Period, which is usually mentioned in the initial sales contract and allows for an even further investigation of the property by the buyer. However, there may also be other times when a cancellation form may be utilized, such as a post-inspection or if buyer financing cannot be obtained for some unforeseen reason.
Ultimately, a real estate contract cancellation form is a significant tool that both buyers and sellers should carefully understand, examine and consider when going through the home buying process.
Essential Elements of a Real Estate Cancellation Form
While real estate contracts are often detailed and intent on protecting the interests of the parties, the cancellation of a contract does not need to be quite so intricate. In many scenarios, a simple form is sufficient. However, to avoid problems down the line, it is vital that contracts include the right stipulations for the cancellation process. A real estate contract cancellation form can be as simple as a single page that includes the basic details of the contract (terms, parties, etc.) and specifies who has the right to cancel and under what circumstances, how the cancellation should be communicated (in writing, by filling out a separate form, etc.), and that there is no liability even if the offer and acceptance process is essentially repeated in reverse.
Generally speaking, in the case of real estate contract cancellation, there will be: the property being canceled (including an address and/or tax identification number), the parties involved, terms of the contract to be canceled, and instructions for cancellation that include who will perform the actual cancellation (if it is not by the same agency that coordinated the contract) and how the cancellation will be communicated. It may also include any additional details the parties want to add that are specific to the deal.
It is essential to have a cancellation form in addition to the original contract because it proves that all parties involved have come to a mutual understanding about the end of the contract. It can be helpful both for your own records and to provide a document you can share with other parties as you go through your next deal.
Common Reasons for Cancelling a Real Estate Contract
The reasons why real estate contracts are cancelled range from buyers’ remorse to financing contingencies not being cleared. Buyers and sellers can both back out of a contract if contingencies are not met. A cancellation of the contract must be in writing unless it’s effectuated under the terms of the contract. Buyers are sometimes forced to terminate transactions after the inspection repairs cannot be agreed upon or when the appraisal is below the agreed upon purchase price.
If inspections reveal defects issues arise which prospective purchasers feel should be repaired by the seller before closing the transaction, and disagreements arise between the parties the buyer may have the right to terminate the contract which would result in a return of his deposit money. In its most simplest terms, this is the home inspection contingency. Inspection contingencies come into play after that initial inspection where the buyer can either back out or attempt to renegotiate the deal if the inspection results were not favorable. This is generally why 2-3 weeks closes are not the norm and instead are the exception. Understandably, sellers want a buyer who is going to close the transaction without objection.
Financing and appraisal contingencies also allow buyers and sellers to back out of a deal. Many times, a buyer has a preapproval letter in hand. But, if the appraisal comes back and the house appraises for less than the purchase price, unless the buyer wants to come to the table with $50,000-$100,000 more the buyer can walk from the transaction and keep all deposits and not even pay a commission. Most real estate contracts incorporate financing conditions all of which are oriented around the ability of the buyer to obtain a mortgage commitment. The most important mortgage condition is that the purchaser shall be able to obtain a written commitment for a loan. More to come on the appraisal process as it’s own post.
Both buyers and sellers are entitled to cancel contracts based on breach of contract. For example, if the seller fails to make repairs. A requirement that there be a full, clean and recorded deed is a condition precedent. As such, a buyer can avoid the purchase if the deed is not duly recorded. Or, if the seller should fail to produce a good and merchantable title to the property. Or, if the seller fails to provide copies of condominium certificates in a timely manner. Sellers similarly are entitled to cancel if the buyer fails to make a timely deposit. Or, if a condition precedent such as financing approval is not satisfied.
This blog post will continue with more detail on the topic of mortgage commitments and appraisals in later posts.
Implications of Cancelling a Real Estate Contract
As with all things real estate related, the consequences of canceling a contract can be quite serious. A party can be liable for damages, liable to return funds (such as a deposit), and may even be issued a non-compliance notice from their brokerage or real estate board.
A contract isn’t always easily canceled. Most contracts are legally binding. If you decide to cancel a contract merely because you signed it and now regret doing so, the courts may not agree that you have enough legal grounds to terminate a contract that you freely entered into. Even when it is clear that both parties want to cancel the contract (for whatever reasons those might be), the reasons still need to fall within the legal grounds for terminating a contract. Contracts are binding and they are enforceable as such in a court of law.
Some legal grounds for cancellation of a real estate contract include:
To dispute the terms of a contract, you would have to prove they weren’t agreed to or fulfill the terms set in the contract in some way. The contract would then need to be terminated. In the event that the contract contained conditions, the buyer would have to verify that they were fulfilled. If the buyer didn’t dismiss the conditions on the contract in the terms outlined in the contract, then they would be considered invalid.
Even though some contracts may have gaps in them, it is still unclear whether the courts would dismiss it as a whole or they would just correct the hole or error in the contract. You won’t know the courts view on the contract until you file a dispute and the judge makes their decision. Do not assume anything about a contract and make sure you don’t sign it before seeking legal advice about what to expect if you encounter a conflict.
It is important that you seek legal advice if you decide to cancel a contract. Even if you’re able to cancel a real estate contract, there are still some legal implications that you could end up dealing with. For example, a party might be able to keep the deposit for the property in instances where there has been a breach from the other party.
Make sure you get legal advice on all matters of contract cancellation and whenever you make a decision that might lead to more serious legal consequences.
How to Properly Cancel a Real Estate Contract
Paragraph 15 of the Arizona Association of Realtors (AAR) Residential Resale Contract states the buyer has three days to deliver notice to the seller if the seller does not remove all contractual contingencies required for closing. Once the contingencies have not been removed within those three days (i.e. the buyer was ready, willing and able to close but the seller failed to remove the contingencies), the buyer has the right to cancel the contract by providing a written notice of cancellation to the seller.
When the buyer cancels the contract pursuant to Paragraph 15, the Buyer should do so by using the AAR Cancellation of Contract form. The Buyer will fill out the top left hand corner with their name and address. On the second line, the box "Buyer cancels" will be checked. The box "Contract" should also be checked as the document being cancelled. The first paragraph of the Cancellation notice states that the date of the contract being cancelled is the "Effective Date" on page 1 of the Contract. In the next section you are to write in the Property address, the Seller name and the escrow company.
If you go to the bottom of the Cancellation form, after printing the names of the parties and signing, you will see that the form states that the Buyer is doing this within the three day period discussed above . If the Buyer did not provide a full three days of notice, immediately after the signature space, the language states that the cancellation can still be effective, but not in accordance with paragraph 15. This means that the Buyer has agreed to give up the rights he/she had in paragraph 15, and essentially is cancelling the contract without complying with the provisions relating to Paragraph 15.
The cancellation form will need to be delivered to the seller pursuant to the instructions on page 6 of the Contract. The Buyer needs to have someone deliver the notice of cancellation to the seller, and then have that person sign and date the Notice of Cancellation to "prove" that the cancellation notice was received by the seller.
As you can see, cancelling a contract is not as simple as saying "I am cancelling this contract". One can unwittingly give up serious contractual rights in the provision discussed above (i.e. making a cancellation that at first appears to be in compliance with paragraph 15 is not in compliance, but then gives up the protection of paragraph 15).
In like manner, if the call is reversed, and the seller wants to cancel the contract for the same reason, the same steps would be followed except the top left corner of the form would state "Seller cancels" and "Buyer". The seller would then fill out the bottom of the page with Buyer’s name and address and signatures, as required by the AAR form.
Using a Cancellation Form Effectively
When using a real estate contract cancellation form, it is essential to make sure that every party who is signing it is aware that the agreement contains instructions to begin the countdown clock for the contract’s expiration. This should not be taken lightly. Failure to comply with the basic requirement of proper communication for acceptance can devastate any opportunity to force the other party to comply with the terms and conditions of the original contract.
In accordance with the world of communication, in order for an effective cancellation of a real estate sales contract to be carried out, it is vital for the parties to effectively communicate with one another. Basic questions should be asked and answered, such as whether both parties have access to email and whether they would prefer to use an electronic or paper copy of the documents. It would perhaps be best practice to avoid any questions concerning their availability unless such a piece of information is required to carry out the commencement of the cancellation.
In the event that one or both parties has failed to communicate that they received the relatively basic requirements of the offer, this may prevent an effective cancellation of the real estate sales contract. However, when both parties are aware of the instructions, the cancellation form is in full effect upon properly given notice. If either party attempts to back out of the agreement by not effectively cancelling the cooperation of the cancellation, both parties have the option of contacting a real estate litigation attorney in Orlando to force the cancellation and begin the process of obtaining the damages that are owed.
It is important for either party to communicate with one another to the best of their availability—including instances when people move. When a real estate contract is in the process of being cancelled, it is recommended that both parties keep each other aware of where they are moving or any other changes in circumstances that could affect their availability.
When to Consider Alternatives to Contract Cancellation
The decision to cancel a contract is often not easy. There are several options available in negotiating a solution to the issues resulting in the proposed termination of any real estate contract.
Recent transactions have shown success with an option to renegotiate the real estate contract…perhaps a price reduction, the seller paying some buyer’s closing costs, extending the time for the seller to cure (fix) any defect and then closing, a closing date extension, etc. There could be an adjustment in the closing date with the buyer having the option to terminate on a certain date if the issue has not been cured. If there is an issue with an agreed upon exercise of option, the closing date could be moved to allow the seller time to exercise the option. The exercise of an extension option may need to be put in writing per an existing lease. In recent experience , a price reduction was agreed that netted the seller a higher price from the proceeding buyer in today’s market with bidding.
Contract amendments can also be successful. This could be an adjustment in the closing date or addressing specific issues for the property that are making the sale difficult. By way of example, perhaps an issue with a co-owner preventing the sale. It could involve some of the contract contingencies being eliminated to achieve a sale. If it is a cooperative sale, perhaps a third party could be allowed to close or take title.
Mediation is another option. This alternative for some consists of abiding by the Colorado law requiring a contract dispute mediation process in the Residential Seller’s Property Disclosure. This alternative may be considered appropriate for personal reasons where numerous parties are involved in a sale. It may also be used when dealing with newly created entities with no prior history.
A negotiated solution is always desirable. However, some circumstances warrant terminating the contract pursuant to the terms of the contract.