Notes on Terminating an Agreement of Sale

The Notice of Termination of Agreement of Sale (Form TER) was designed to accommodate sellers and buyers who were exercising a right to terminate granted by the Standard Agreement for the Sale of Real Estate.

For example, if the agreement is contingent upon a property inspection and the buyer finds the inspection report to be unsatisfactory, buyer may “terminate this agreement by written notice to seller…”  Similarly, when the agreement is contingent upon mortgage financing, if the buyer’s lender does not provide documents demonstrating approval by a certain date, “Seller may terminate this agreement by written notice to buyer.”

The requirement to terminate “in writing” is simple enough but members, instead of drafting a clear notice of termination, often chose to use the Agreement of Sale Release (Form AREL) that they, erroneously, equated to a notice of termination.

A Notice of Termination is unilateral. That is, the execution by one party is sufficient to terminate the Agreement of Sale. Why? Because the Agreement of Sale granted the right to that one party.

A release, on the other hand, only terminates an agreement when it is signed by both parties (bilateral rather than unilateral). Think of a release as an agreement to undue the Agreement of Sale, hold the other party harmless and provide where the deposit goes.

Consider the seller who wanted to terminate the agreement because the buyer’s mortgage commitment was not received by the due date. The seller’s agent sent a release to be signed by the buyer. The buyer did not sign, but instead prompted his lender to issue the commitment and then demanded that the seller go forward. Had the listing agent merely sent a note saying that the agreement was terminated, it would have sufficed.

It is worth noting, though, that a Notice of Termination can, like the release, be misapplied. Terminating an agreement based on certain perceived breaches by the other party may not be appropriate if the agreement does not explicitly grant a party the unilateral right to terminate. For example, if a seller failed to disclose a known material defect, that may not justify termination. If the buyer serves a Notice of Termination in this situation, is the buyer now in default. Without answering, my advice is that when termination is sought because of a perceived breach of the Agreement of Sale or perhaps the Seller Disclosure Statement, counsel should be consulted and it should be counsel who constructs what and how the other side is to be served with notice of the remedy sought. Save the Notice of Termination for situations where one party is terminating based upon a clear right of termination granted by the Agreement of Sale.