Avoid Legal Snafus Around Canceled Contracts

Published by REALTOR Magazine | March 15, 2023

Home buyers or sellers may back out of a home sale for any number of reasons, but lawsuits are a real risk. Know how to protect yourself.

Most real estate professionals have had a client with cold feet back out of a deal at the last minute. Maybe the client got psyched out over finances or is dealing with a life-changing circumstance that prevents him or her from following through on a sales contract. Whatever the case, you need to make sure that when you cancel a contract, you’re not breaking your fiduciary responsibilities.

While only 5% of sales contracts nationwide were terminated in January, according to the most recent REALTORS® Confidence Index, that figure was at 16% last July—the highest rate in the previous two years. The midsummer spike was attributed to a sharp rise in mortgage rates, which scared off many buyers at the closing table. The latest Window to the Law video from the National Association of REALTORS® addresses the legal considerations you should keep in mind in case you’re involved in a canceled contract.

Even though signed purchase contracts are legally binding, they often include an exit plan if one party wants to back out. A home buyer, for example, may be able to cancel a contract because of a contingency or during an attorney review period. Canceling a contract can become trickier when the reason falls outside of the agreed-upon contingencies. But unfortunate circumstances, such as a job loss or change in household status, may result in the need to cancel.

In every transaction, real estate professionals can help their clients understand the acceptable “outs” to avoid the risks of losing escrow money or even facing a lawsuit, NAR staff attorney Mike Rohde says in the Window to the Law video. “Every contract has an implied duty of good faith and fair dealing, which means parties must act honestly, cooperate with the other party and not discourage or hinder the agreement’s completion,” he adds. Breaching this duty could jeopardize a buyer’s or seller’s legal rights and lead to litigation. “And as a fiduciary, an involved broker’s actions or inaction may be scrutinized when a contract is terminated.”

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