An anticipatory breach of contract occurs when one party to a contract, without justification, makes a positive statement indicating they will not or cannot perform the contract. An anticipatory breach may excuse the other party’s performance. Anticipatory breach is important in real estate because when a buyer tells the seller they cannot or will not be able to close, the seller does not want to wait until closing to declare the contract terminated. Obviously, an anticipatory breach is a serious matter. For that reason, Oregon courts have ruled that “before a party to an executory contract may be said to have anticipatorily breached the same he must refuse by acts or deeds to perform his obligations under the contract positively, unconditionally, unequivocally, distinctly and absolutely.”
Suppose the buyer’s agent calls the seller’s agent three weeks before closing to say it looks like the buyer will not be able to come up with funds necessary to close. Is this an anticipatory breach? Probably it is not because the statement is not a positive, unconditional, unequivocal, distinct or absolute refusal to perform. How about if a few days later the buyer’s agent sends over a signed termination agreement stating that the earnest money is to be returned? Is that a refusal to perform? Again, probably it is not because most termination forms do not contain a refusal statement; they just ask if the other side will agree to mutual rescission of the contract.
If a buyer has not committed an anticipatory breach, and the seller is unwilling to agree to mutual rescission, the seller is stuck. Unless something more is done, the seller can end up having to wait until the closing date to declare the contract terminated. Sometimes waiting for the closing date is the best approach but it is also possible, once the buyer’s performance is reasonably in doubt, for the seller to force the buyer to declare their intentions. This is done by the seller seeking written assurance the buyer will perform.
Written assurance means a notice from the seller to the buyer stating clearly the reason the other party’s performance is in doubt and asking that the buyer give assurance that they will perform and how. For instance, in our example, the seller would send the buyer a notice stating that the seller has learned through the buyer’s agent that the buyer will not be able to come up with the funds necessary to close. The letter would then state the seller’s intent to enforce the contract according to it terms and ask the buyer to provide the seller with assurances that the buyer will perform as required by the contract. A short deadline (a day or two) for receipt of the buyer’s assurance is given.
If no assurances are forthcoming by the deadline, the seller is in a much better position to declare an anticipatory breach than they were. The trick when dealing with anticipatory breach (really any breach that comes before closing) is caution. A seller too quick to declare the buyer in breach can find that they, not the buyer, is the one who has breached. This is what makes the concept of “out of contract” so dangerous.
Take, for instance, a dispute over whether the buyer has applied for a loan on time or used best efforts to obtain the loan. If, based on their own assessment of the situation, the seller declares the buyer “out of contract,” the seller may themselves unwittingly commit an anticipatory breach. If it turns out the seller was wrong about the missed deadline being material, the seller’s attempt to terminate will turn out to be unjustified and risk being a material breach that excuses the buyer’s performance. Oh, what a tangled web!
Anticipated breach can trigger emotional responses. As the professional involved, resist the urge to respond emotionally and counsel your client against it. If the other side is talking about getting out of the contract and you don’t agree, stop and think about how to clarify the situation. Sending around a termination agreement that never gets signed by the other side doesn’t accomplish anything. What is needed is a document that states your position clearly and demands the other side do the same.
Stating your position clearly and demanding the same of the other side gives your client information they can use to make a rational decision. At a minimum, your efforts to clarify the situation will prevent the other side from later changing their story. More to the point, it will prevent them from claiming surprise or mistake when your client declares the contract terminated. Take, for instance, a situation in which a buyer sends over a termination agreement saying they haven’t been able to obtain a loan and demanding return of the earnest money. The seller believes the buyer has not used best efforts and refuses to sign the termination agreement because they want the earnest money. With no termination agreement and no positive refusal to perform, the deal goes into limbo.
This scenario is repeated every day in real estate, but there is no need for it. Refusing to sign a request from the other side asking for mutual rescission of the contract just keeps the existing contract in place. In other words, it does nothing. What is needed is for one side or the other to declare the contract terminated. Only once it is clear the buyer will not seek to perform the contact can the property safely go back on the market while the parties fight over the earnest money. Unsigned termination agreements are a prescription for disaster.
Rather than just refusing to sign, the seller should give the buyer notice that unless the seller hears otherwise within a very short time (24 or 48 hours) they will consider the buyer to have unilaterally terminated the contract. Then, at the end of the deadline, if the buyer’s response is anything other than we are going to perform, the seller can give final notice that they consider the buyer to have terminated due to buyer’s non-performance. At that point, it is much safer to move on to find a new buyer.
Terminating a contract is always a risky business if the parties cannot agree to the termination. Mutual rescission agreements (termination agreements in the parlance of the trade) are always the preferred means of terminating a contract because they leave no doubt. When, however, there is a dispute about terminating the contract, an unsigned termination agreement is simply too ambiguous to rely on. In such situations, it is wise to clarify the situation in writing and give the other side a short time to respond before unilaterally declaring the contract terminated by the non-performing party and moving on.
A real estate agent should, of course, always be careful about not practicing law. That means not making positive statements about legal consequences. An agent should always state facts, not consequences. It is not the practice of law to send a notice to the buyer saying the seller is in receipt of their termination agreement and has not signed it because the seller does not believe the buyer has used best efforts to obtain the loan. It is not the practice of law for the seller to give the buyer 24 hours in which to either assure the seller they will perform the contract or state clearly their grounds for refusing to perform. These are just facts. If a statement of consequences is needed, it should come from an attorney not a real estate agent.
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