What is the right way to void a contract? The short answer is - it depends on what the contract says. Default v. Void. Before we dive into what the parties’ rights and obligations are under the standard forms provided by the Northern Virginia Association of Realtors (“NVAR”), let’s differentiate two terms that are often mistakenly used interchangeably: default and void. The rights and obligations of the parties in the event of a default of contract versus a voided contract are separate and distinct - and if you inadvertently use the word “void” instead of “default”, you risk absolving the breaching party of their obligations under the contract - so it’s important to ensure we’re using the right terminology for the circumstances.
If a contract is being terminated due to the default of one party, the defaulting party is at fault. The defaulting party either failed to do something they were contractually obligated to do under the parties’ agreement or did something they were contractually obligated to refrain from doing. As a result, the defaulting party can be held liable for the consequences of that breach of contract. The rights and obligations of the parties in the event of default are outlined in Paragraph 26 of NVAR’s Residential Sales Contract (NVAR Form K1321).
By contrast, if a contract becomes void, there is no fault or breach of contract by either party. The rights and obligations of the parties in the event the contract becomes void are outlined in Paragraph 27 of NVAR’s Residential Sales Contract and can be found in its entirety below. Notice that in the event the contract is voided, the provision requires both parties to immediately execute a release directing the return of the earnest money deposit to the buyers (for a sample, see NVAR Form K1116).
27. VOID CONTRACT. If this Contract becomes void and of no further force and effect, without Default by either party, both Parties will immediately execute a release directing that Deposit, if any be refunded in full to Buyer according to the terms of the DEPOSIT paragraph.
When can a contract be voided? A contract can be voided in a number of different scenarios. Some examples include when buyers exercise their right to void a contract pursuant to a home inspection contingency, a financing contingency, an appraisal contingency, or following receipt of HOA documents. When this occurs, there is no fault or breach of contract by either party.
How do I void a contract? In the event the contract becomes void, the rights and obligations of the parties are outlined in Paragraph 27 of NVAR’s Residential Sales Contract ("Sales Contract") (NVAR Form K1321). Note, buyers need to deliver a notice voiding the contract, such as NVAR’s Notice Voiding Contract (NVAR Form K1367), and the parties need to execute a release as outlined in Paragraph 27. If the contract specifies that additional documents or terms must be met as a prerequisite to the buyers' exercise of their right to void the contract, those terms must also be satisfied. By way of example, where buyers are voiding a contract due to an unsatisfactory home inspection report, NVAR’s Home Inspection and Radon Testing Contingency Addendum requires that buyers also deliver a copy of the entire home inspection report along with their Notice Voiding Contract and release.
What if the sellers refuse to sign the release of the EMD? If either party refuses to execute a release as outlined in Paragraph 27, that refusal could constitute a default of contract. When a party fails to do something they are contractually obligated to do under the contract or takes an action they are contractually obligated to refrain from doing, the defaulting party is in breach of contract and can be held liable for the consequences of that breach. The rights and obligations of the parties in the event of default are outlined in Paragraph 26 of the Sales Contract and allows, with respect to a refusal to sign a release, a court to order reasonable attorney's fees and other expenses incurred in litigation to be charged to the breaching party. The relevant language from Paragraph 26 can be found below:
26. DEFAULT. … If either Seller or Buyer refuses to execute a release of Deposit (“Release”) when requested to do so in writing and a court finds that such party should have executed the Release, the party who so refused to execute the Release will pay the expenses, including, without limitation, reasonable attorney’s fees, incurred by the other party in the litigation.
A deep understanding of the Sales Contract allows one to confidently communicate with counter parties, which will go a long way towards amicably resolving contract termination issues.
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