Thursday, March 03, 2005

Termination and Default -- What's the difference?

A new purchase and sale agreement has come in use in the Alaska market this year. It makes many improvements. One such improvement answers questions that always come up when the buyer or seller don't do something the contract calls for.

The new agreement frequently uses the word "terminate". For instance, if the seller fails to accept the offer by the day and time the buyer states in the offer, the offer terminates. If the offer has been agreed to and the buyer fails to produce a letter from the lender that verifies the buyer's qualifications, the agreement terminates. If the buyer and seller fail to agree on a buyer's or a lender's repair requests by the stated date, the agreement terminates.

Nobody has to do or sign anything when an agreement terminates. The deal is off and the buyer's earnest money gets refunded.

Default is a different matter. The rules are different for buyer and seller.

A buyer is in default if he or she fails to tell the seller that the lender won't meet the agreed date for granting a loan commitment. A buyer is in default if after obtaining a commitment he or she doesn't close.

A seller might be in default if the seller doesn't close without good cause.

If a buyer is in default the seller gets the earnest money. By contract the buyer and seller agree that this is the entire remedy for a buyer's default. The seller can't pursue a claim for other damages, or get a court order requiring the buyer to close.

By contrast, if a seller is in default, a buyer would have the right to seek specific performance.

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