Imagine that you have entered into a purchase agreement by which you have sold a property or a plot of land to a buyer. Then problems arise because the buyer does not keep to the agreed terms. For example, he refuses to pay the purchase price. Sometimes, in such a case, you may want to compel payment of the purchase price. In other cases, it is preferable to end the agreement. There are several ways to end a purchase agreement: rescission, termination, annulment and by mutual consent. How you end an agreement has different legal consequences. This article zooms in on the termination of property-related purchase agreements
By law, you can terminate an agreement if the other party fails to fulfil its obligations under the agreement and is in default. In other words, there must be (1) a shortcoming and (2) default. A shortcoming exists when a party fails to honour one or more of the terms of the agreement. For example, if payment of the purchase price for the property is not made on time by the buyer. This is also known as breach of contract. Default may take several forms. The main rule is that you must give the other party written notice and set a reasonable period within which the other party can fulfil the terms. If the other party subsequently fails to fulfil the terms within this reasonable period, it is in default.
But default can also occur if a strict deadline has been exceeded. For example, if it was agreed in the purchase agreement that the purchase price had to be paid no later than a certain date and it was not paid by that date. The buyer is then automatically in default. Even if the buyer indicates that he will not fulfil his obligations, default also commences. In addition to these situations, there are a number of other legal grounds by which default commences.
Contractual grounds for termination
In addition to the statutory provisions, it is also possible to arrange your own terms for the termination of the purchase agreement. Standard purchase agreements for houses usually include a financing and/ or construction proviso. These are, in fact, resolutive conditions. With a financing proviso, the purchase agreement states that the buyer is entitled to cancel the purchase agreement if he fails to secure part of the financing. If the buyer can prove this, he can terminate the purchase agreement without owing the penalty that is often included in purchase agreements. A construction proviso ensures that you, the buyer, are entitled to terminate the purchase agreement if the structural survey shows that the costs that are directly necessary exceed a certain amount. The purchase agreement often includes a deadline after which these resolutive conditions must be invoked.
How can you terminate a purchase agreement?
One can terminate a purchase agreement both in its entirety and partially. Termination can take place via the Courts, but this is usually not necessary. A purchase agreement for a property or piece of land can be terminated by a written statement, such as by letter, registered letter or e-mail.
The law includes a number of exceptions. While leases and employment contracts do have to be terminated via the Courts, there is also an exception to this.
Consequences of the termination of a purchase agreement
The purchase agreement ends upon termination of the agreement. Termination has no retroactive effect. Previous obligations already fulfilled at the time of termination are therefore not unduly fulfilled. Termination does ensure that the parties have to undo their obligations, however, thereby returning the situation to what it was before the purchase agreement was concluded.
Another important consequence of termination is that, as the terminating party, you are entitled to compensation. This does not apply in the case of rescission. An example: if the buyer fails to obtain financing and the deadline by which the financing proviso may be invoked by the buyer has expired, the seller can rescind the purchase agreement. In such cases, the buyer is obliged to compensate the loss of the seller. Purchase agreements for houses often include a provision that in such cases, the buyer must pay at least 10% of the purchase price as a penalty to the seller.
There are many pitfalls when it comes to the termination of property-related purchase agreements. This means that you should always make sure you get proper advice before taking any steps and keep an eye on deadlines. In addition, problems can often be prevented up front. For example, by specifically indicating in the purchase agreement the instances when the purchase agreement can be terminated. Instead of using the term ‘end’, specifically indicate when there is a ground for termination, rescission or annulment. Also important is that the statutory provisions regarding termination are of a regulatory nature. Thus, parties can also contractually exclude the possibility of termination.
Do you have questions about your purchase agreement or any other agreement? Please do not hesitate to contact me or one of the other specialists at GMW advocaten to discuss your options.