Section 18 Unit 3 Termination of a Purchase and Sale Contract

Sue Ellen has a contract to buy Roger's house, which she has always admired, when Roger decides he's ready to move to a senior living community. After Roger finds a suitable senior apartment and moves, Sue Ellen writes a check for the agreed-upon amount, and Roger transfers the deed to her. What is happening in this scenario?

Performance

Bobby has signed a real estate contract with Zeke to purchase Zeke's three-bedroom cabin. Bobby's put down $20,000 in earnest money. However, three weeks later, Bobby finds out his company is relocating him and he has to back out of the contract. Zeke gets to keep that $20,000 from the earnest money, so he's not exactly crying into his beer. Which remedy is being used?

Accept liquidated damages

One of the original parties transfers rights to a different party but may still be liable for obligations.

Assignment

What does it mean for the parties when a breach of contract occurs? There are three correct answers.

Both parties agree to terminate the contract. The innocent party terminates the contract. The guilty party can terminate the contract with permission from the aggrieved party.

The buyer is laid off and submits a denial letter before the deadline for the mortgage contingency.

Buyer

Millicent and her neighbor, Tommy, agree to swap houses. Because they both hate to move, they also agree to leave all of their furnishings behind, but take their personal belongings. Both parties do exactly what they say, and they don't even have to do a change of address—they simply install a vacuum mail chute between the two houses. Is this an example of performance, assignment, or novation?

Performance

Which of these statements about earnest money is true?

Disbursal of earnest money depends on the terms of the contract.

First, what constitutes a breach of contract?

One party fails to meet the obligations of the contract.

Both parties have met all the terms agreed to in the contract.

Performance

Joe Dunlap is buying a house from Jenny Shaker for $230,000. They're only two weeks from closing when Joe finds out he's been laid off from his job. He and Jenny agree that it's best to cancel the contract, because without a job, Joe won't get approved for his loan. Jenny has a back-up contract on the property, so she moves ahead with that new buyer.

Mutually rescind the contract

Kendra enters a contract to sell her home to Madge. After the inspection, Madge insists that Kendra replace the roof, which is damaged. Kendra refuses, and the parties agree to cancel the deal. Of what is this an example?

Mutually rescinding the contract

An original party is replaced with a new party, and all rights and obligations belong to the new party.

Novation

Brad has accepted an offer in a new town. He gets his lender to allow him to substitute a new borrower for the loan. With everyone in agreement, Brad is relieved of his responsibility for the loan. Is this an example of performance, assignment, or novation?

Novation This is an example of novation of a contract because a new party has replaced the original party in the contract, and the original party has been relieved of all contractual obligations.

What's the key difference between assignment and novation of a contract?

Novation releases the original party from all obligations, while assignment does not.

Bryce is tired of waiting for his subcontractor to get his part of the deal done. The agreed-upon deadlines have come and gone, and Bryce is losing money waiting for the subcontractor to meet his obligations. If the subcontractor isn't going to honor his commitments, neither is Bryce. He decides to consult with his attorney and then terminate the contract. Of what is this an example?

Rescinding the contract unilaterally

The buyer is laid off and denied a loan after the deadline passes for the mortgage contingency.

Seller

Which of the following situations would result in the earnest money being disbursed to the seller?

The buyer gets cold feet and cancels the transaction on the day of closing.

In an ideal real estate transaction, what happens to the buyer's earnest money?

The money will be subtracted from the final amount the buyer must bring to closing.

Buyer Lainie and seller Jackson are a week from closing on their sales contract when Lainie loses her job. She notifies Jackson right away, because without a job, she can't get a mortgage. Jackson understands the situation, and the two agree to cancel the contract. Jackson returns Lainie's earnest money. Which of the following is true of this situation?

This is an example of mutual rescission.

In order for performance of contract to occur, the parties to the contract must meet the terms of the contract in a timely manner. What phrase is often used in contracts to convey the need for the parties to proceed in good faith and not unduly delay the process?

Time is of the essence.

Let's say you have a buyer who wants to negotiate the sale price on a property after the home inspection reveals that major repairs are needed. You get your dates mixed up and contact the sellers a day too late. Whoops! The buyer loses the earnest money and is livid. Who could the buyer rightfully sue to get the money back?

You, the agent *gulp*

Samantha makes an offer to buy Dirk's home, and he accepts it. Under the terms of the agreement, Samantha is supposed to put down an earnest deposit of $15,000. However, she only puts down $10,000. Dirk accepts the lesser deposit, and the sale is ultimately finalized. Of what is this an example?

Accepting partial performance

Before the transaction closed, Beauford substituted his cousin, Sylvester, as the buyer. He reserved his right to do so in the offer. Unless the contract between Beauford and the seller releases Beauford from his obligations, if Sylvester fails to perform, Beauford is obligated to do so. Is this an example of performance, assignment, or novation?

Assignment This is an example of assignment of contract because although a new party has been selected as a substitute for the original party to the contract, the original party remains liable to the contractual terms. In many states, a contract is assignable as long as it does not say that it is NOT ASSIGNABLE. That means that you don't have to write "and/or assigns" on the contract to be able to assign it.

The McShanes have found the home of their dreams—again. They're trying to buy in a seller's market and are tired of having their offers passed over. This time, they pull out all the stops and have their agent put together the offer that's way over asking price. They also waive the inspection contingency—meaning they agree to buy the house as-is—and they waive the appraisal contingency, but keep a loan contingency in place. To show the seller just how serious they are, they state that $2,000 of their $5,000 earnest money deposit will "go hard" if the seller accepts their offer without negotiation. Unfortunately, just before closing, the McShane family faces a major medical crisis and they lose their loan approval after taking on too much debt. The McShanes get $3,000 of the earnest money back and $2,000 goes to the sellers.

$3,000 $2,000

Jasmine and Tony Disnee sign a sales contract with seller Britney to purchase her two-bedroom house. In the contract, the Disnees agree to pay $10,000 of their earnest money when the contract is accepted, and another $20,000 two weeks later. Two weeks pass, and they don't make the second payment. Britney rescinds the contract, keeping the earnest money. Which two remedies are being used?

Accept liquidated damages and Rescind the contract unilaterally

Damian enters into a contract to sell his home to Lori, who puts down a $5,500 earnest money deposit. At the last minute, Lori backs out of the deal. Damian keeps the earnest money deposit. Of what is this an example?

Accepting liquidated damages

Megan finds herself in a breach of contract situation. While the other party met some of his obligations, some were not met. Megan thinks it would cost a lot of time and money to sue the other party. Thus, she decides to accept the work that has been done and call it good. Of what is this an example?

Accepting partial performance

Brian and Bella sign a sales contract to purchase Ken's house for $400,000. He agrees to replace the roof by April 25, one week before closing. At the walk-through two days before closing, the buyers can see that Ken had the old roof removed, but the new one hasn't been put on yet, and now the house has sustained serious water damage after severe storms in the area during the past week. Ken refuses to pay for the water damage to the house, and says he fired his contractor, so he can't get a new roof installed for another week to 10 days. Brian and Bella, who still want the house, claim that he's already costing them money because they aren't going to be able to close in time, and that means they're not getting the interest rate they'd locked in. And now they're going to have to extend their lease, pay a change fee for the moving company, and pour more money into this house because of water damages that Ken caused. No way. Which remedy will they choose?

Sue for damages