TER + AREL = TERAREL

The standard forms library has three(ish) forms that can be used to end a contract. Three forms that, despite the similar outcome, cannot be used interchangeably. But when do you use each of these forms? To know that, you have to understand the difference between a termination and a release of a contract. 

What is a termination? 

Termination is a unilateral cancellation of the parties’ agreement. It is typically done pursuant to a right granted in the agreement itself; pretty much anywhere the Agreement says, “Buyer may terminate,” or “Seller may terminate,” it grants a right to end the contract. By signing the Agreement in the first place, the parties have acknowledged that these rights to terminate exist and no further “permission” is necessary. 

What is a release? 

A release of the agreement is used when both parties agree that they are not moving forward with the transaction. The parties can jointly decide for any reason, or no particular reason at all, that they are just done and would like to walk away — they are releasing each other from their bargain. The parties can agree that they will end their Agreement. 

Form TER 

Form TER, Notice of Termination of Agreement of Sale, is used to terminate the agreement. The form is written to push the terminating party to identify their contractual right to terminate in order to avoid legal trouble. If you cannot point to a phrase in the contract giving the right to terminate, tell your client to think twice and recommend a consultation with an attorney, since a unilateral termination may not be appropriate.  

The form only requires the signature(s) of the “terminating party” and is effective upon delivery to the non-terminating party. For this reason, the Notice of Termination should not be used as a bargaining tool. To frame that in the context of certain PAR Legal Hotline calls, it is a bad idea to send any signed termination form with a note that says, “We are going to terminate if you don’t agree to my client’s demands.” Delivery of the form ends the deal, so once it’s in the hands of the other party, the contract is already terminated.  

Form TER is best used in situations where a party has the contractual right to terminate the contract, but there are no escrow deposits to worry about. A common scenario might be if a buyer decides to terminate a transaction for a property in a condominium or HOA a few days after execution, and prior to making a deposit. The Agreement (and the law) gives the buyer the right to terminate the contract in that situation, and since there’s no deposit to deal with there’s no need for a form that discusses deposits. 

Form AREL 

In contrast, the Agreement of Sale Release and Distribution of Deposit Money (Form AREL) requires both parties’ consent to end the contract. The form is very simple and states that the parties agree to release each other and others involved in the transaction from any further liability under their agreement. If a deposit has been provided, the parties can direct how that deposit is to be distributed. Both parties must sign the release for the contract to end and for the money to be given out. 

Imagine a scenario in which a seller is having second thoughts about selling the family home, and it turns out the buyer is getting cold feet about the transaction. Neither has the contractual right to unilaterally terminate the contract, and using a termination form could actually put them in default of the contract. But if they were to have a conversation and realize that both want out, Form AREL allows them to mutually agree to end the contract, and then to figure out how to disburse the deposit. 

Form AREL could be used as a negotiation form because one party’s signature is merely a request and not a unilateral action. In a way, it’s similar to sending a Change of Terms Addendum (Form CTA) — it’s a starting point for a discussion, but doesn’t become effective unless the parties agree to terms. 

Form TERAREL 

Form TERAREL is the third(ish) form in the form library. Though it is a different piece of paper with a different name, Form TERAREL is merely a combination of Form TER and Form AREL (hence the long abbreviation). This form is generally the one to use when one party has the right to terminate the contract (TER), and there is a deposit to distribute (Form AREL). 

Though in this form they are combined, the individual parts have the same effect as the individual forms. For example, if a buyer signs the termination section of the TERAREL, the contract is terminated, regardless of whether the seller agrees to the suggested distribution of a deposit in the release section.   

Hotline Bonus 

One of the most common legal hotline scenarios with these forms comes up when buyers have elected the mortgage contingency but are having trouble getting financing and don’t have a commitment by the mortgage commitment date. Here’s how the forms could play out: 

• After the commitment date, the seller can unilaterally terminate the contract (because the Agreement says they can). 
  • Presuming that there is an escrow deposit, the best form is Form TERAREL, because it both terminates the contract and distributes the deposit.
  • If there is no deposit, or if the seller knows there will be a major dispute over distribution, it would also be acceptable to just use Form TER.
• A buyer who realized they won’t be able to get financing and wants to get out of the contract cannot unilaterally terminate the contract (because nothing in the Agreement says “buyer can terminate if they don’t get financing). Or to be more specific, a buyer who submits a termination form does, in fact, terminate the contract — but potentially puts themselves in default because they did it without any contractual right to terminate. 
  • Whether there is a deposit or not, the buyer should use Form AREL as an opening to a conversation that probably sounds something like “I’m clearly not going to get the financing approved, so can we just agree to go our separate ways?” If the seller agrees, then the deposit is addressed and everyone moves on. If the seller doesn’t agree, the buyer has at least avoided putting themselves in default.