Amendments and Out Clauses to the Agreement of Purchase and Sale
July 23, 2019
Brokers are responsible to ensure their licensees understand this process.
This article discusses:
- what is an out clause;
- out clause triggers;
- notice of dissatisfaction;
- accepted and rejected amendments;
- out clause implications; and
What is an “out clause”?
A clause that allows either party to terminate is often referred to as an “out clause”. The wording of an out clause takes many forms. An out clause could be worded using language, such as: “deemed to have been acceptable”, “deemed to be satisfactory” or “unless written notification to the contrary”, etc.
The Agreement of Purchase and Sale (APS) contains clauses that allow the buyer and/or the seller to terminate an APS once written notice of dissatisfaction is given by a specified date. All parties must review the clauses in the APS. Should it be required, additional clauses can also be added to an offer to allow either party to terminate.
It is recommended your client speak with their legal counsel if you are unsure if a certain clause could be considered an out clause trigger.
Examples of out clauses in the APS are Deposit (clause 1), Buyer’s Conditions (clause 4) and Lawyer Review (clause 8), etc.
What are out clause triggers?
An out clause in an agreement may have various triggers. A common example is when the buyer is unsatisfied with the inspection. The buyer or the buyer’s licensee sends written notice of dissatisfaction to the seller/seller’s licensee before the clause deadline. This notice of dissatisfaction may allow either party to trigger a termination.
What is notice of dissatisfaction?
An out clause in the APS requires written notice of dissatisfaction or notice to the contrary. This can be in a form of a/an email, fax, text, letter, etc. A signature on the notice of dissatisfaction is not required unless stated in the agreement.
The submission of an Amendment to the APS to an out clause term can also serve as notice of dissatisfaction, even if the word “dissatisfaction” is not used. If in doubt, clients should be directed to seek legal advice before proceeding with the submission of an amendment.
Example: A buyer instructs their licensee to give notice of dissatisfaction as a result of an inspection. The notice can be relayed in writing, such as an email or a letter, or by the submission of an Amendment to the APS. The buyer instructs their licensee to prepare an amendment and request that the seller repair certain items. The following situations could come of this:
A. ACCEPTED AMENDMENT
If the amendment is accepted by the seller, then all parties agree to the terms of the amendment and all remaining terms and conditions in the agreement shall remain in full force and effect.
B. REJECTED AMENDMENT AND TERMINATION
If the amendment is rejected by the seller, either party can terminate the agreement because notice of dissatisfaction has been given or interpreted to be notice of dissatisfaction.
C. REJECTED AMENDMENT CONTINUE WITH AGREEMENT
If the terms of the amendment are rejected by the seller, the agreement can continue (if agreed to by all parties) with all the terms and conditions in the agreement remaining in full force and effect.
What happens if a relayed amendment is rejected that does not trigger an out clause?
If a party presents an amendment that does not trigger an out clause and the amendment is rejected, it does not give either party grounds to terminate the agreement. This means that nothing has changed with the original terms of the agreement.
Example: An amendment that only requests an extension of the closing date would not trigger an out clause (the ability to terminate).
What are the implications of an out clause?
It is crucial the written notice of dissatisfaction is clearly written when provided to the seller. If the out clause explicitly states the buyer is providing notice of dissatisfaction, either party can terminate. However, even without specifically using the word “dissatisfaction” the seller and/or their legal counsel could interpret the clause as notice of dissatisfaction. If it is interpreted as notice of dissatisfaction, it may require the seller and/or their legal counsel to defend their interpretation if they are challenged by the buyer.
You are responsible for discussing the implications of an out clause with your client. It is also your responsibility to recommend they speak with their legal counsel prior to providing written notice of dissatisfaction, submitting an amendment, or terminating an agreement.
If a buyer submits an amendment and the seller rejects the amendment but does not sign to indicate they are rejecting, is the amendment considered void?
A party is not required to respond to an amendment to the APS. If notice of dissatisfaction to an out clause was provided in the Amendment to the APS, the seller would then be at liberty to terminate.
Example: If the seller does not respond to the Amendment to the APS citing dissatisfaction to an out clause, the Amendment is then null and void and the APS remains in full force and effect OR the seller can terminate.
As a licensee, you are responsible to explain to your client the possible outcomes that can result from submitting notice of dissatisfaction, either in an amendment or another written form. It is also your responsibility to advise your client to discuss with their legal counsel if they wish to provide notice of dissatisfaction, submit an amendment, or terminate an agreement.