A Primer on Contract Cancellation in Florida
The process of canceling a Florida real estate contract is not as straightforward as one would think, especially considering the hefty financial interests at stake. Broadly speaking, Florida law permits the cancellation of a real estate purchase contract – or "rescission" – under several scenarios, and also imposes requirements on the parties to a contract prior to cancellation being permitted. Rescission is one way for injunctive relief to be obtained by a party on the real estate contract. However, unlike rescission, revocation is a unilateral act giving rise to a cancellation of the contract. For example, when the contract is previously induced by a material misrepresentation or fraud, then a buyer can unilaterally cancel the contract. This occurs in most cases involving a material breach of contract. Of course, the parties can both agree to rescind and cancel the contract on mutually agreeable terms and conditions.
The key aspects of the general Florida laws governing the cancellation of a real estate contract include:
- The timing of cancellation or revocation is generally important. Each party to a contract that is induced by a material misrepresentation may rescind the contract within four years. This time frame does not necessarily run from the date of a buyer’s last payment, for example, but rather may run from the date of discovery of the basis for revocation or economic loss.
- Florida requires an express agreement between the parties to the contract that would permit recision to be canceled. Florida Statute §672 . 106 provides that the agreed-upon remedy for threatened or actual breach is an adequate remedy. This means that if the parties expressly agree to a condition precedent, their enforcement of the contract (including reasonable time limits) is sufficient and no rescission is permitted.
- Florida law requires the injured party obtain a judgment estopping him from obtaining injunctive relief, i.e., a judgment in his favor in limiting the plaintiff’s ability to obtaining a particular type of equitable relief.
- In Florida, the court will determine whether the injured party properly performed under the contract. This is evidenced by the terms of the contract relating to the sale of the property, such as the nature and extent of agreements between the parties. Any purported "escrowed" payments may now be recovered by a party if complied with.
- The general Florida laws governing the cancellation of a real estate contract are subject to equitable estoppel principles calling for the court to act only when it will do justice. The court may deny a requested order without a hearing, unless the plaintiff proves its allegations. A real estate contract may be deemed to be enforceable even if a condition precedent is not met. Alternatively, a failure of a condition precedent may render the contract unenforceable.
- The agreement should specifically set forth what the parties have agreed to with respect to cancellation, including the time frame and conditions under which the right to cancel may occur. Contracts must be in writing to be enforceable.
Legal Justifications for Cancelling a Real Estate Contract
There are many different ways to cancel a Florida real estate contract, some more straightforward and obvious than others. Cancelling the contract doesn’t automatically entitle a party to the return of the deposit money paid. Whether each side is entitled to their deposit will depend on the reason behind the cancellation. If the contract has not closed yet, the seller must return the deposit to the buyer if no contractual grounds for retaining it exists. Some reasons that provide valid legal grounds for cancelling or rescinding a Florida real estate contract include:
Failure to Disclose: Florida cases regularly hold that an undisclosed defect in the property is an unsatisfied condition that may allow a buyer to cancel the contract. The seller has a legal duty in Florida to disclose (or tell) the buyer any defect in the home that materially affects the value of the property. The law does not require a seller to disclose every little imperfection, or even a defect that is visible at a casual inspection of the property. Instead, the duty to disclose requires a seller to tell a buyer important and potentially damaging problems with the home.
Financing Failure: Parties can include financing contingencies provisions in their Florida real estate contract, allowing the buyer to cancel the contract without penalty if certain financing conditions are not met. A common example of this is a condition where the buyer is unable to obtain a loan. But having the agreement of the seller to extend the closing on the real estate contract is a way of the deal to survive the financing problem. The buyer cannot cancel the sale by simply failing to show up for closing.
Fraud: The Act states that a party can cancel a real estate contract for fraud or misrepresentation entitles the other party to rescission, or cancelling, of the contract. A common example of fraud in the real estate context is if a seller lies to a buyer about the square footage of the home for sale. But if the buyer obtains the comfort of a contingency period to inspect the property, the buyer has the opportunity to discover the lie himself – voiding the ability of the buyer to claim damages resulting from the fraud.
How Contingency Clauses Work
In a Florida real estate transaction, the parties are wise to include specific contingencies that must be satisfied before the contract is deemed binding. The failure of a contract condition to be met may result in the party’s obligation to proceed with the contract vanishing. Common examples of contingencies that are often included are the parties’ ability to meet certain conditions within a defined time period. Typical contingencies require an inspection of the property and/or the buyer obtaining financing for the transaction.
An inspection contingency gives the buyer the ability to have the property inspected, specifying the period in which that inspection must occur. Generally, this occurs within 15 – 30 days after the acceptance of the offer. If any proposed repairs are identified by the inspector, the buyer can either terminate the contract if the repairs will be too costly to either the buyer or the seller or ask the seller to complete the repairs as part of the contract.
Another contingency is the buyer obtaining financing for the purchase of the property. Without the ability to finance the purchase, the buyer would not have the funds to pay the remaining balance of the purchase price after a down payment. Thus, should the borrower fail to secure financing on the property, the buyer is able to unilaterally terminate the contract. Failure to obtain financing means the buyer would merely have lost the money "upfront." Moreover, failing to obtain financing means the seller is now fundamentally without a buyer and may be less likely to obtain the original, or even higher, sale price should the property be resold if it gets off the market for an extended period of time. However, representing yourself as unable to "qualify" for financing may not necessarily get you out of the contract. You may need to demonstrate that you made a good faith effort to secure financing or you may be seeking the wrong type of loan that your lender was not able to obtain.
A contingency will not permit the buyer to act unreasonably, although the specifics of what constitutes "unreasonable" behavior will depend on the contract language. It is important to remember that the broker or attorney working for the client can be held responsible and be liable if he or she fails to draft the contract properly.
Obligations of the Buyer and Seller
Both buyers and sellers of real estate in Florida have defined obligations related to the cancellation of contracts. It is incumbent upon both parties to follow through with all obligations in order to mitigate their losses.
Obligations of Buyers
- Failure of Contingency: most residential real estate transactions contain various contingencies. For example, in a standard Florida purchase and sale agreement, there is a loan approval contingency and a home inspection contingency. If these contingencies are not met by the necessary dates, the buyer has the right to cancel the agreement without penalty.
- Legal Notice: If a seller does not fulfill their obligations under the contract, the buyer must give legal notice of the breach and at least 5 days to cure the problem before cancelling the contract if the contract/agreement requires such.
- Time is of the Essence: All contracts have a time is of the essence clause locked into the contract which means that if any time deadlines are missed, the contract is cancelled despite any notice of default being provided.
- Failure of Buyer to "Close": The buyer can be held liable for liquidated damages if the failure to close is based on a default by the buyer.
Obligations of Sellers
1. Failure to Cure: The seller has a duty to cure the failure to meet any obligations by the seller within 5 days of any notice by the buyer of the breach, or the buyer can cancel. If the buyer fails to provide such a notice and subsequently cancels the agreement, the buyer could potentially be liable for liquidated damages set forth in the contact.
2. Time is of the Essence: if the seller fails to satisfy the contingencies they had to satisfy by the date set forth in the contract, the buyer is entitled to cancel.
Legally Canceling a Real Estate Contract
In the state of Florida, a real estate contract can be legally canceled when both parties agree to the cancellation, or by a party when the other has breached a material provision of the contract. A mutual cancellation of contract occurs when both parties agree to release each other of any and all obligations they may have under the contract, whereas an individual cancellation or rescission occurs when the cancelling party has legally terminated the contract with or without the other party’s agreement, usually due to the other party’s breach of contract.
If both parties agree to terminate the contract, the cancellation or rescission process is relatively quick and simple, as it involves the execution of a mutual release or letter of cancellation that terminates the rights and obligations of both parties under the contract, and in effect, permits the parties to walk away from the contract as if it had never existed. Further, any deposit made under the contract is returned to the cancelling party, and the parties’ only remaining obligation is to cancel any pending risky financing or other contingencies related to the contract.
When a real estate contract is cancelled by one party, the cancellation procedure depends on which party has breached its obligations under the contract. In general, the cancelling party will make a written demand for cancellation to the other party , setting forth the reasons for termination. The cancellation demand will typically include a deadline by which the other party must respond or cure the defect or otherwise be deemed to have breached the contract.
Upon receipt of the cancellation demand, the non-cancelling party has a contractual obligation to either cure the problems, respond to the cancellation demand, or reject the cancellation between three and five days, depending on the nature of the contract relating to a residential sale of a home, condominium, or townhouse. If the non-cancelling party’s response does not resolve the issues within the cancellation demand, the contract is considered breached, and the cancelling party may proceed with a declaration of lien under Florida Statute 715.07, which places a lien on the subject property for any deposit paid under the contract. Placing the lien on the property effectively gives the cancelling party an "in" to the property, allowing them to inspect the premises, re-test for any potential defects, and seek copies of the seller’s disclosures, if applicable, to determine if there are additional grounds for cancellation.
If the parties are unable to resolve their differences, the cancelling party will then be permitted under Florida law to file a lawsuit asking the court to award cancellation of the contract, based on the other party’s material breach.
The Effects of Cancelling a Real Estate Contract on Deposits and Other Payments
In the event of a cancellation, the treatment of any deposit paid under the terms of the contract becomes an issue. The Florida residential real estate contract forms (here’s a comparison chart of the two forms) contain deposit disposition instructions for circumstances where the transaction falls through, i.e., buyer or sellers default, buyer’s financing does not close, or the buyer disapproves of a report after an inspection. Generally, the contracts are written to provide for return of the deposit to the buyer and require the seller to instantaneously return the deposit without demand.
If the parties disagree on the requested release of the deposit, then one of them has the option to institute a interpleader action in order to obtain a court order directing the deposit holder to disburse the funds, leaving the parties to the legal battle to determine fees and costs for obtaining the interpleader and the resulting release of the deposit. Typically, the agreement to reimburse the prevailing party for attorney’s fees does not apply to interpleader actions, so that is another area of risk in deciding whether to file such an action.
This being said, there are situations where the covenants of the contract for deposit release fail to accurately reflect what happens on a cancellation when either or both of the parties are not upholding their respective obligations under the agreement. Here is where the mechanics of the contract are important, as the general rule is that a seller is entitled to keep the deposit as liquidated damages upon a buyer’s default.
To combat the seller’s right to hold or keep the deposit is the buyer’s right to cancel or rescind a contract for fraud or other hobbled negotiations in the closing process that harm the buyer. In such cases, the buyer should record a notice of rescission in the public land records in order to legally terminate the cancelled contract.
If the buyer’s earnest money deposit was recovered by the selling broker at closing, then the buyer may be out of luck and will need to obtain a release of lien, as the earnest money deposit can be classified as a payment under the purchase agreement at closing. Even if the seller says they will return the deposit to the buyer after closing, if there is no indemnity agreement or other release of lien between the seller, buyer and deposit holder, then the buyer is not guaranteed any return of deposit and will need a separate action to recover the funds from the earning broker.
In contrast, the standard real estate contract provides that the deposit shall be held by the seller, which places the money firmly in the possession of the seller. A seller that fails to instruct its broker to return the deposit will not be able to claim liquidated damages as a defense against the return of the deposit, since it had physical control of the funds during the entire contract period.
Avoiding the Legal Consequences of Cancelling a Contract
When cancelling a real estate contract, there are several mistakes and pitfalls to beware of. When cancelling a contract, there are certain statutory requirements that must be met. If you do not comply with those requirements, you may set yourselves up for litigation. Also, if you think that you have a right to cancel the contract, do you? Sometimes damage awards are not as large as you think because they do not have attorneys’ fees and costs built in.
A common mistake I see is people attempting to cancel a contract based on a financing contingency when there are other provisions in the contract allowing the seller to cancel, but the buyer does not satisfy the financing contingency. For instance, let’s say the buyer is entitled to a refund of the deposit if they cannot close because they cannot get financing by a date in the contract. Let’s say that the buyer is unable to do so. The seller sends a notice stating that the buyer did not comply with the loan commitment deadline, and the seller is entitled to cancel the contract and keep the deposit. Buyer closes and closes notwithstanding the seller’s attempt to cancel. You may be able to have a court cancel the contract, but probably not. The buyer closed, and that was all the buyer needed to do. The buyer kept the contract on course and the seller never had a right to cancel the contract so long as the buyer was willing to close. Of course, if the buyer would not close, the seller could sue for specific performance, or liquidated damages.
In Florida, you need to be very careful when attempting to cancel a contract based on a financing contingency. The failure to comply with the financing contingency is not usually grounds to terminate the contract unless the contract specifically allows it. Even when the contract permits the seller to terminate it due to the buyer’s inability to close, if the buyer closes notwithstanding the notice to cancel, the contract has not been cancelled. You also have to look at the specific language in the contract to make sure the right to cancel is clear. There are certainly circumstances where the seller terminates the contract and the buyer comes into court and says, "Hey, I only received your letter purporting to cancel the contract after I complied, therefore, I complied." That is a possibility.
Where the seller has the right to remedy the situation, the best option for the seller is to do so, then the seller can compel the buyer to specifically perform. The seller is also able to rescind the contract or declare the contract void.
This article is intended for information purposes only and does not create an attorney-client relationship with the authors, Elegant Solutions Realty or Destin Real Estate Law, Division of Harris Law Center.
Getting Legal Help with Contract Cancellations
Amidst the host of on-line forms and resources available, people tend to forget about the need for a lawyer when entering into a legal contract. It is important to be represented by a knowledgeable Realtor and a real estate attorney. If the attorney or Realtor is not knowledgeable, you may be paying a little less today for big problems later. Unless you are planning on making a lot of money in the short run, it is important that you have the advice of an attorney before you decide to cancel a contract . An experienced real estate attorney makes all the difference. An attorney will review what has been included in the legal contract and can assess your chances for winning if the case is taken to court. He/she will lay out for you all of the options available to you, instead of just relying on the advice of someone who could be ill informed. If conflict arises, the attorney can help you settle the matter or fight the case in court for you; or just help you to stay out of unnecessary litigation.
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