By Jones Osborn II

Real estate is normally sold by a written purchase and sale agreement. After signing the purchase and sale contract, the parties usually sign another contract--escrow instructions--on a form provided by the title company. This is a three-party contract between the buyer, the seller, and the escrow agent. The existence of two separate contracts--often inconsistent--which purport to govern the same transaction can give rise to some interesting questions.

Suppose you sell some property, and the other party doesn't perform on the closing date. Can you immediately "blow him out" and exercise your legal remedies, or do you first have to give him some sort of written notice and an opportunity to cure?

To answer that question, we must first look at the purchase and sale agreement--not the escrow instructions. If the purchase and sale agreement requires some sort of written notice before cancellation, say ten days, then ten days notice must be given. If the defaulting party cures within his ten days, the contract is reinstated and the parties must close. So in that situation, the purchase and sale agreement governs and you can't blow him out the minute he defaults.

What if the purchase and sale agreement says nothing about written notice, but simply specifies a closing date?

In that case, it is first necessary to determine whether the closing date is a material term of the contract. In most cases it is, especially if the contract says that "time is of the essence." However, there may be cases where it is possible to show that the exact closing date was not particularly important to the parties. If that is the case it is probably necessary to give reasonable notice before cancelling.

Assuming that the closing date is material, however, and it usually is, then the contract may be immediately terminated if a party fails to perform on the closing date. No advance notice is required. You can immediately cancel the contract and pursue your remedies, which might be the forfeiture of earnest money, or a suit for damages or specific performance.

That all seems simple enough. An interesting question arises, however, in the common situation where the purchase and sale agreement doesn't say anything about notice, but the escrow instructions do--that is, the escrow instructions contain the typical "thirteen-day cancellation" provision. This is a clause contained in virtually every printed form of escrow instructions used in the State of Arizona. This clause says that if a party doesn't perform, he must be given thirteen days written notice. Only if he fails to cure his default during the thirteen days may the escrow be cancelled. This raises the question: Is it necessary to give thirteen days notice to cancel where the purchase and sale agreement is silent but the escrow instructions require thirteen days notice? Surprisingly, the Arizona courts say no notice is necessary! The purchase and sale agreement may be cancelled immediately upon default and without advance notice. The result is that the thirteen-day provision contained in the escrow instructions is virtually meaningless! The courts reach this perverse result by reasoning that the escrow instructions are merely a means of carrying out the purchase and sale agreement, are not part of that contract, and do not change it in any way. According to the courts, after the underlying purchase and sale agreement is terminated there is simply no agreement left to be closed, even though the parties agreed in writing that they would be given thirteen days notice and would have an opportunity to cure any default.

It's not quite that simple, however. As always, there is an exception. In this case, the exception is that if the escrow instructions specifically and expressly state that they are intended to modify the purchase and sale agreement, they do. So if the parties state in the escrow instructions that thirteen days notice must be given, and also state that the escrow instructions (or this particular part of the escrow instructions) modify the underlying purchase and sale agreement, then they do, and thirteen days notice of default must be given.

The Lessons. We can draw the following lessons from these principles:

1. It is good practice to specify in the purchase and sale agreement whether notice of default is required, and if it is, to specify exactly how many days notice must be given before the contract may be cancelled. If you want thirteen days notice, say so in the purchase and sale agreement. If you don't want any notice to be required, say that too.

2. It is advisable to state in the purchase and sale agreement that "time is of the essence" so that the closing date will be considered a material term of the contract. This can eliminate one whole area of dispute if there is ever a default.

3. If you want the escrow instructions to change the terms of the purchase and sale agreement, you can do so, but only if the escrow instructions expressly state they are intended to modify the purchase and sale agreement.

4. If you are in danger of defaulting, don't assume you will be given notice and an opportunity to cure just because the escrow instructions say so. If the purchase and sale agreement doesn't provide for notice, you probably aren't entitled to it, and can be "blown out" the minute you default.

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The leading Arizona case in this area is Allan v. Martin, 117 Ariz. 591, 574 P.2d 457 (1978).