The Contract Has Been Cancelled: A Closer Look At One Common Real Estate Truism

By David Hamerslough

July 25, 2018

A truism is a self-evident statement or one based on factual evidence that is accepted as an obvious truth that does not require further evidence.

Over the last month, I have had several clients rely on a particular real estate truism to explain why they were right and the other party was wrong with respect to their dispute. This statement was "the contract has been canceled."

Each of my clients made this statement with such conviction that they believed it to be absolutely true. Each client believed that the statement justified their position legally and the adverse party had to accept it.

This is not the first time I have heard this truism. Listening to my clients and discussing the issues that arise with respect to such truisms is what prompted me to write this article. I will briefly discuss the context in which this statement was and is typically made and identify some of the issues that may impact how an arbitrator, judge or jury might view this truism and whether they accept such a statement as dispositive of any dispute.

"The Contract Has Been Cancelled"

This statement was made by the listing agent and seller after they attempted to cancel a contract but the buyer had refused to go away, even though the cancellation documentation specified that the buyer's deposit would be returned to the buyer.

Both the PRDS and C.A.R. purchase contracts give the buyer and seller the right to cancel the contract under certain circumstances. A right to cancel, even if exercised, does not necessarily mean that the contract has in fact been cancelled. A legally enforceable cancellation requires the mutual consent of buyer and seller and consistent agreement on all of the terms and conditions of that cancellation (e.g., the disposition of the deposit).

The listing agent and seller were frustrated with the buyer because the buyer had not attempted to remove the funds for the purchase from her government retirement account. My clients believed that they had properly exercised the right of cancellation and therefore did not understand why they did not have the right to immediately sell the property to another buyer without first obtaining a formal written cancellation from the first buyer. Their frustration was compounded by the fact that the first buyer claimed that she could not access her retirement funds until the parties had reached a complete agreement on all of the terms of the seller financing provided in the purchase contract, thus the buyer claimed that she was still in contract.

Whether there was, in fact, a fully agreed upon contract that the parties could cancel was the first issue that needed to be confronted, especially in view of the lack of agreement on all of the terms of the seller financing. Unfortunately, the listing agent and seller had delivered a Notice of Cancellation, which was an act that arguably was inconsistent with taking the position that there never was a contract between the parties in the first place.

In addition, the Notice To Perform had given the buyer less time to obtain the funds than had been provided for in the purchase contract. This created an additional issue as to whether the Notice To Perform was effective.

Although the buyer argued that the Notice was defective and they had not finalized the terms of the seller financing, she refused to acknowledge that there might not be a contract because there was no meeting of the minds regarding the terms of the seller financing. The buyer refused to sign a mutual cancellation and invoked the mediation clause. These delays were contrary to the seller's desire to close the escrow quickly or resell the property to a viable backup buyer who made an all-cash offer and could close in 10 days.

The resolution was to agree on the terms of the seller financing and give the first buyer one opportunity to close the escrow but to have that buyer sign a cancellation agreement and release of any contractual rights that would be effective only in the event that escrow did not close within the new timeframe for any reason.

The bottom line is that the effectiveness of a unilateral cancellation by one party may depend upon a number of facts and issues. The belief that the contract has been cancelled is a truism only if there is mutual written agreement between the parties on all terms and conditions related to that cancellation or there has been a legal determination of that fact by an arbitrator, judge, or jury.

Some of the issues that may impact an attempt to cancel include whether a Notice To Perform has been properly prepared and properly delivered. This applies to both the PRDS and the C.A.R. contracts. When the cancellation is based on a failure to close escrow, the PRDS contract does not require a demand to close but, depending on the circumstances, may require a tender of performance. On the other hand, the C.A.R. contract would require that an actual Demand To Close Escrow form must be properly prepared and properly delivered.

There are other legal concepts that can also affect a right to cancel, including waiver, estoppel, and time is of the essence. Another issue is what grounds were asserted for the right to cancel and whether those grounds are valid and can be supported by the transaction documents. It can be important to know who asserted the right of cancellation and (where the buyer does so first) whether that conduct prevents the buyer from later stating that they are entitled to proceed with the contract. The effectiveness of the cancellation will also depend upon the facts and circumstances under which these actions occurred.

Even when the cancellation process is perfect, there can still be a dispute between the principals that can prevent reliance on this truism. If a buyer is going to assert contract rights even when they are not supported by the facts, some of the factors that may come into play include whether the buyer is only asserting a right to the return of their deposit rather than claiming that they have a right to continue with the purchase contract. Does such a claim prevent the buyer from later attempting to resurrect the contract? Can a seller resell the property under such circumstances without obtaining a release or cancellation from the first buyer? Will buyer #2 be a bona fide purchaser for value? If buyer #1 does not step aside and allow the resale, are they interfering with the seller's rights and causing them damage? To what degree are any of these issues impacted by liquidated damages and the resale of the property? Clearly, these and other issues need to be considered before simply proclaiming that any deal has been cancelled.

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