Out Clauses in the Agreement of Purchase and Sale
January 31, 2020
The Commission regularly deals with questions from licensees and consumers regarding the application of out clause(s). Please ensure you clearly understand the following concepts.
*The following may also apply to a lease agreement or an agreement of purchase and sale that is not written on a Commission-approved form.
What is an “out clause”?
Any clause in the Agreement of Purchase and Sale (APS), which allows either the Buyer or Seller (parties) to terminate, is often referred to as an out clause. The wording of an out clause may take many forms. It could be worded using language, such as “These conditions shall be deemed to be satisfactory to the Buyer unless the Seller/Seller’s agent is notified to the contrary, in writing, on or before the date outlined in the clause. If notice to the contrary is received, either party shall be at liberty to terminate this Agreement…” Examples of out clauses in the APS are Deposit (clause 1), Buyer’s Conditions (clause 4) and Lawyer Review (clause 8), etc.
If a party wants to exercise their ability to terminate an agreement using an out clause, they must provide written notice of dissatisfaction to the other party prior to the date specified in the agreement clause.
What is Notice of Dissatisfaction?
Notice of dissatisfaction is when one party relays to another party their written notice that they are not satisfied with a condition of an agreement. It is necessary to relay the notice prior to the date specified in the clause. Notice of dissatisfaction can be in the form of, but not limited to: an email, fax, text, letter or an amendment to the APS. A common example of a notice of dissatisfaction is when the buyer is not satisfied with their inspection and relays their dissatisfaction to the seller/seller’s licensee in writing.
Per the language of the clause, either party may be at liberty to terminate the agreement. Be aware that written correspondence may be interpreted by the other party as notice of dissatisfaction even if the word “dissatisfaction” is not used. Licensees have a fiduciary duty to inform their clients of the potential implications prior to relaying written correspondence in regards to agreement conditions. Licensees are to refer their client to legal counsel for advice before proceeding, if necessary.
One example is if a Buyer did not intend to relay notice of dissatisfaction and instructs their licensee to propose an amendment to the APS to extend the financing due date, the seller may interpret this as notice of dissatisfaction and subsequently terminate or attempt to terminate the agreement. Another example is when a Buyer proposes an amendment to the APS to request a price reduction, which could be with or without a reason. The Seller may interpret this as notice of dissatisfaction even without the word “dissatisfaction”.