Dissolution of purchase agreement

Dissolution of purchase agreement

After signing the purchase agreement, it is possible that the agreement may be dissolved by the buyer. In many cases, the purchase agreement will be dissolved based on one of the resolutive conditions included in the agreement. An example of this is the financing contingency. If the buyer is unable to secure financing, the purchase agreement may be dissolved by the buyer. Dissolution of an agreement must always be substantiated in writing. For instance, if the buyer is unable to secure financing, they are often required to provide proof. Such proof is then submitted by attaching a rejection from one or more lender(s) to the dissolution notice.

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Dissolution based on resolutive conditions

The most common dissolution of a real estate purchase agreement occurs via the resolutive conditions included by the parties in the contract. In addition to the financing clause mentioned above, other conditions encountered in practice include: a structural inspection clause, a clause regarding the sale of the owner-occupied home, obtaining an environmental permit, or the failure to obtain a housing permit. A successful reliance on a resolutive condition stands or falls with proper execution: the buyer must inform the seller in writing and with proper documentation before the expiration of the agreed term. If the condition is invoked too late or incompletely, the purchase agreement remains in force, and the buyer may still be obliged to take delivery or to pay a penalty. For the commercial purchase of business real estate, different, tailor-negotiated conditions often apply; in this regard, our lawyers and corporate counsel advise both international corporations and entrepreneurs purchasing their first business premises.

Statutory dissolution for breach of contract (Article 6:265 of the Dutch Civil Code)

In addition to contractual resolutive conditions, there is a statutory right to resolution. Pursuant to Article 6:265, paragraph 1, of the Dutch Civil Code (BW), any failure by a party to perform its obligations generally entitles the other party to resolut the agreement in whole or in part. This applies, for example, when the seller fails to deliver the property or fails to deliver it on time, or when it becomes apparent after delivery that the real estate has a hidden defect that hinders normal use (non-conformity, Article 7:17 BW). The law does, however, provide for an important exception: a failure of minor significance does not justify full resolution. Whether a defect is sufficiently serious requires a legal assessment that varies on a case-by-case basis, in which the judge takes all circumstances into account.

Notice of default and failure to act

Statutory dissolution due to a breach of contract is generally only possible when the defaulting party is in default. This usually requires a notice of default: a written demand in which the counterparty is given a reasonable period to still perform correctly (Article 6:82 of the Dutch Civil Code). Only if performance fails to occur within that period does default occur and the right to dissolve arise (Article 6:81 of the Dutch Civil Code). In certain situations, default occurs by operation of law and no notice of default is required, for example when a fixed delivery deadline expires unused (Article 6:83 of the Dutch Civil Code). The correct order and wording are crucial: a dissolution invoked without default having occurred can itself constitute a breach of contract. Our legal experts draft the notice of default and the declaration of dissolution in such a way that your position is fully protected.

Statutory cooling-off period for the purchase of a home (Article 7:2 of the Dutch Civil Code)

If a consumer purchases a home, a statutory cooling-off period of three days applies pursuant to Article 7:2 of the Dutch Civil Code, of which at least two are working days. Within this period, the buyer may dissolve the purchase without giving reasons and without incurring any costs. The cooling-off period begins to run after the buyer has received a copy of the signed deed of sale. This statutory cooling-off period does not apply to the purchase of commercial real estate by professional parties; in that case, dissolution is only possible via the contractual conditions or the statutory ground for dissolution. It is important to be clear on this distinction, as invoking a ground that does not apply can be costly for the buyer.

Fine and deposit for non-compliance

Virtually every real estate purchase agreement contains a penalty clause. If a party fails to perform after being given notice of default, a penalty of 10% of the purchase price is usually due immediately. As security, a deposit or bank guarantee of 10% is often stipulated. In the event of wrongful dissolution, for example when the buyer does not proceed with the purchase without valid grounds, the seller can claim this penalty and, if necessary, demand performance or additional damages. Conversely, the buyer can invoke the penalty if the seller remains in default. The court may mitigate a contractual penalty in exceptional cases. By understanding both the buyer's and the seller's perspectives, our lawyers and in-house counsel carefully assess when to dissolve the contract and when to enforce performance.

Consequences of dissolution: restitution and compensation

Dissolution does not have retroactive effect, but releases the parties from unfulfilled obligations and gives rise to obligations of restitution for performances already rendered (Article 6:271 of the Dutch Civil Code). Any down payment or security deposit paid must then be refunded, and any real estate already delivered must be legally returned. In addition, the dissolving party may, under certain circumstances, claim additional compensation for the damage it suffers as a result of the breach (Article 6:74 of the Dutch Civil Code), for example, the extra costs of a replacement purchase or the decrease in value of the property. Careful substantiation of the damages is decisive for the outcome in this regard.

Our approach and the broader field of expertise

The dissolution of a real estate purchase agreement often touches upon other issues: an ongoing financing contingency, a dispute regarding a defect in the property, or a contested delivery. Our mixed teams of lawyers and in-house counsel assess your case comprehensively, from the initial notice of default to potential litigation, representing the interests of both the international group and the baker on the corner. This page falls under our broader Real Estate, where we assist you at all stages of a real estate transaction and dispute.