In general, a breach of contract occurs when one party to a contract does not perform on a contractual duty or promise.  Some contracts however, like the  Arizona Association of REALTORS^® Residential Resale Real Estate PURCHASE CONTRACT have special provisions for dealing with different types of failure to perform or produce on contractual duties or promises.  In our contract there is something known as a Cure Period.  The failure on the part of one party to live up to a contractual duty or promise does not automatically become a breach – it is a potential breach.  The Cure Period provides a “second chance” to perform.  Only after given that second chance by delivery of a Cure Period Notice and subsequent non-performance by the deadline is there a breach.

Section 7a of the contract is where this special provision is identified:

Cure Period:  A party shall have an opportunity to cure a potential breach of this Contract.  If a party fails to comply with any provision of this Contract, the other party shall deliver a notice to the non-complying party specifying the non-compliance.  If the non-compliance is not cured within three (3) days after delivery of such notice (“Cure Period”), the failure to comply shall become a breach of Contract.

Only after satisfying this special requirement may the non-breaching party cancel the contract and retain the earnest money as provided for in Section 7b:

Breach:  In the event of a breach of Contract, the non-breaching party may cancel this Contract and/or proceed against the breaching party in any claim or remedy that the non-breaching party may have in law or equity, subject to the Alternative Dispute Resolution obligations set forth herein.  In the case of the Seller, because it would be difficult to fix actual damages in the event of a Buyer’s breach, the Earnest Money may be deemed a reasonable estimate of damages and Seller may, at Seller’s option, accept the Earnest Money as Seller’s sole right to damages; and in the event of Buyer’s breach arising from Buyer’s failure to deliver the notice required by Section 2a, or Buyers inability to obtain loan approval due to the waiver of the appraisal contingency pursuant to Section 2c, Seller shall exercise this option and accept the Earnest Money as Seller’s sole right to damages.  An unfulfilled contingency is not a breach of Contract.

Note the last sentence in that paragraph, “An unfulfilled contingency is not a breach of Contract”.  A breach can only be the result of an unfulfilled promise or duty contained in the contract – not as a result an unfulfilled contingency.

What’s the difference?  Well, an example of a contractual promise might be something like the seller agreeing to replace the roof using a licensed roofer by a certain date.  And, if that did not happen we call it a potential breach and the buyer must issue a Cure Period Notice to the seller.  If after the three day period the roof work was not completed satisfactorily the seller is in breach of contract and the buyer can then cancel the contract and walk away with their earnest money.

On the other hand, an unfulfilled contingency may be something like a buyer being unable to obtain financing (in good faith), or that an appraisal does not support the purchase price.  When this occurs, no cure period is necessary – the contract is automatically canceled and the buyer is entitled to the return of their earnest money.

The actual contract language regarding these two examples is found in Section 2a:

Loan Contingency:  Buyer’s obligation to complete this sale is contingent upon.  Buyer obtaining loan approval for the loan described in the AAR Loan Status Report without conditions no later than COE Date.  If Buyer is unable to obtain loan approval without conditions by COE Date, Buyer shall deliver a notice of the inability to obtain loan approval without conditions to Seller or Escrow Company no later than COE Date.

And, in 2b:

Unfulfilled Loan Contingency:  This Contract shall be cancelled and Buyer shall be entitled to a return of the Earnest Money if after diligent and good faith effort, Buyer is unable to obtain loan approval without conditions by COE Date.  Buyer is aware that failure to have the down payment or other funds due from Buyer necessary to obtain the loan approval without conditions and close this transaction is not an unfulfilled loan contingency.  Buyer acknowledges that prepaid items paid separately from earnest money are not refundable.

There may be any variety of other “contingencies” in the contract that would work basically the same way.   However, some have additional provisions.  For example in Section 2c:

Appraisal Contingency:  Buyer’s obligation to complete this sale is contingent upon an appraisal of the Premises by an appraiser acceptable to the lender for at least the sales price.  If the Premises fails to appraise for the sales price, Buyer has five (5) days after notice of the appraised value to cancel this Contract and receive a refund of the Earnest Money or the appraisal contingency is waived.

However, there is at least one slight variation on this issue if the contract is made contingent on the sale and closing of the buyers’ existing property.  The following statement is taken from the BUYER CONTINGENCY ADDENDUM - a separate document - intended for use with the Arizona Association of REALTORS^® Residential Resale Real Estate PURCHASE CONTRACT:

UNFULFILLED CONTINGENCY: If the Sale and Closing of Buyer’s Property is not completed by date specified, this Contract shall be deemed

cancelled due to an unfulfilled contingency. In such event, Buyer shall deliver a notice that the Sale and Closing of Buyer’s Property is not completed no later than the date specified. In the event of Buyer’s breach arising from Buyer’s failure to deliver the required notice, Seller shall exercise the option in Section 7b of the Contract to accept the Earnest Money as Seller’s sole right to damages.

Sometimes the emotional and stressful roller coaster of the home buying process can cause us to get upset when the other party to a contract isn’t doing what they are supposed to.  A thorough understanding of the above provisions can help smooth things out.

DISCLAIMER

John P. Hale is owner and Designated Broker of Touchstone Residential Realty, Inc., 2485 West Tom Watson Drive, Tucson, Arizona 85745.  He has been a residential real estate agent in the greater Tucson Metropolitan area since 2000.  In addition to being licensed as a Broker rather than a salesperson, John holds the following designations awarded by the National Association of REALTORS^®:  ABR – Accredited Buyer Representative, ASR – Accredited Seller Representative, CRS – Certified Residential Specialist, and GRI – Graduate Realtor Institute.  And, John is among the very few that have been named, MRE – Master of Real Estate by the Arizona Association of Real Estate.