Backing out of a Deal: Conditions Are Not Escape Clauses

31 August 2016

Many Realtors incorrectly advise their clients that a condition can be used as an escape clause. For example, there is a conditional offer on Financing between a Buyer and a Seller. The Buyer wants out of the deal. The Realtor had advised the Buyer that it shouldn’t be a problem because the clause wording states:

"This Offer is conditional upon the Buyer arranging, [..]a new […]Mortgage satisfactory to the Buyer in the Buyer's sole and absolute discretion.[…]"

In this scenario, the Buyer’s Realtor communicates with the Seller’s Realtor that financing fell through and submits a mutual release. On the surface, it appears that a reason is not required. However, the Seller can then take legal action if they suspect that foul play is at hand.

The guiding principle in contract law is good faith. Meaning, that both parties have to reasonably make good effort to fulfill their contractual obligations. Should the Seller take legal action, the court will require proof from the Buyer indicating that they tried to obtain financing from multiple sources, and inquire into the Buyer’s income and expenses. Some Buyers may then try to skirt around the issue by stating that the rate of the mortgage was too high and they were expecting a discounted rate. The problem is that some standard clauses (Ex: Mort-4) does not state the rate the Buyer is seeking and therefore the Buyer is subject to be considered by the court based on current public offerings. Additionally, you the Realtor may be found liable for damages in part or in full.

So, how do you protect yourself and protect your Buyer client?

  • Communicate in writing to your client before the conditional offer is accepted both parties must do their best to fulfill their contractual obligations.
  • At no time tell your client that they can back out of a deal easily through a condition. For example, minor inspection issues can not solely be the reason for backing out of a deal or renegotiating price.
  • If your client has special requirements, make sure that the clauses you use properly cover them. In some cases, you may want to seek legal advice prior to creating a custom clause to ensure legal enforceability and to avoid inadvertently voiding a contract.

Remember, the easiest contract to get out of is the one you don’t sign.