It is not uncommon for either a seller or buyer to desire the termination of a contract for the purchase or sale of property. All rights to terminate are established in the contract itself which enumerates the rights and obligations of each party. So, to begin exploring wrongful termination, let’s look at the contract!
The Colorado Contract to Buy and Sell Real Estate establishes dates and deadlines for every right and obligation of the parties. These dates and deadlines must be exercised on or before the related deadline, in good faith, to remain in compliance with the agreement. There are forty-three such dates and deadlines in the Contract.
Time is of the Essence
The contract incorporates a legal concept in the execution of events required known as “time is of the essence.” Essentially, the timing of every event required to close a transaction must be done on or before the deadline attached to that event as memorialized in the contract. If no action is taken by the respective deadline, the party has either lost that right or they have breached the contract under that provision.
For example, a buyer often has a right to have the property inspected, make requests of the seller to fix or replace (called objection), or simply terminate. If the buyer allows this “Inspection Objection” date to pass without any objection, the buyer has lost the opportunity to object to these conditions of the property.
On the other hand, if the seller is obligated to provide a particular document and does not provide the document by the agreed upon deadline, the seller would then be in default of the contract.
The concept of time is of the essence also applies to a sellers party’s right to terminate a contract. While buyers have many opportunities to terminate, sellers have relatively few. Attempts at improper termination can occur in a myriad of circumstances, opening the possibility of legal action against the wrongfully terminating party.
Misuse of Termination Rights
Buyers have attempted to use one deadline to terminate based on a different objection right. Let’s say a buyer did not have an inspection that was allowed under the contract and therefore missed the deadline to object. Later, that same buyer decides they do not want the house because of the condition of the property and attempts to use a different buyer termination right to terminate. This buyer would be in default of the contract as they are not negotiating in good faith, as agreed in the contract, and risks the loss of earnest money at a minimum.
On the other hand, let’s presume a seller has accepted an offer from a buyer and is now “under contract”. A few days later the seller receives another offer from a different buyer at a higher price or more favorable terms than the first buyer. Were this seller to exercise another seller termination right for this reason, the seller would be in default and could be sued for “Specific Performance”, forcing the seller to sell to the first buyer and be awarded damages to the buyer as well. There is no “I don’t want to honor the contract” clause in the contract. Contracts may not be dismissed by one of the parties without the right to do so.
Proper Methods of Termination
Finally, we would be remiss to ignore a summary of the proper method(s) of termination. Section 26 of the Commission Approved Contract to Buy and Sell sets forth notice requirements, including the requirement that any notice be in writing and physically delivered. As an alternative to physical delivery, electronic notice is articulated in Section 26.2. Common methods for electronic notice include fax or email. Problems arise when Instant Messaging is used to accomplish notice. Text messages are often unclear, imprecise and may lack proper time stamp to document timely notice. Care should be taken to avoid text communications in most negotiations, certainly where notice is involved.
Broker Responsibility
Brokers have the responsibility to explain these dynamics and assist the parties in navigating the contract, all in a timely manner as set forth in the dates and deadlines. Every competent broker is required to educate the parties and make certain the parties understand and remain in compliance with their respective rights and obligations. Brokers that knowingly facilitate bad faith negotiations will be sanctioned by the Colorado Real Estate Commission if discovered. Ramifications to the buyer and seller will be determined by the judge in a legal proceeding.