What are They and Why Are They Important?

By Natalie Friesenhahn

It’s becoming all too common. Builders citing a little known and often buried clause within the borrower-builder construction agreement. Recognized as the “termination by convenience” clause, it states a builder can cancel a contract for convenience at any time for any reason.

Over the last year, in the midst of the housing boom and the home construction market’s record growth, many lenders are seeing this clause used more frequently, and it appears homeowners are increasingly being subjected to what some are calling “builder abuse.”

So, what is the clause and how can borrowers protect themselves while lenders assist their customers? Read on for more.

What is the Termination by Convenience Clause?
The “termination by convenience” clause is a contract clause in many new home builder contracts, giving the builder the ability to change the previously agreed upon price or simply cancel the contract altogether.

Following is one of the most common examples of a termination for convenience clause:

“Builder’s Right to Terminate: Notwithstanding anything herein to the contrary, Builder maintains the right to terminate this Contract for convenience and without regard to fault or breach. In the event of such termination, Builder may terminate this Contract by providing written notice to Buyer and neither party shall have any further sights, obligations, or liabilities to the others or under this Contract. Should Builder elect to terminate this Contract, Builder shall refund the Cash Deposit, sum of all Change Orders, and all other sums Buyer paid Builder pursuant to the Contract. Builder reserves the right to convert any termination of the Contract into a termination for convenience. Builder is not obligated to provide notice prior to terminating the Contract pursuant to this paragraph.”

Why are These Clauses Being Implemented?
While not rocket science, builders use the contract clause for – get this – its convenience. These cancellations can occur for a number of reasons. Citing unprecedented escalation of supply costs, issues with difficult borrowers, or “more favorable” conditions in the sale of a property elsewhere, builders are enacting the clause at an increased rate over the past year.

What Buyers Should Know
As potential homeowners navigate these new and unique circumstances, what can they do protect themselves?

As a general rule, review the contract extremely thoroughly, and as Mom always said, “Read the fine print.” In many cases, prospective buyers do not scrutinize the contract, line by line, so they don’t understand all of the inherent risks. Lenders also recommend prospective buyers strike undesirable or unacceptable contract conditions, line by line when applicable.

Unfortunately, given the exceptionally favorable housing market for sellers, builders can insist on keeping chosen language in an agreement. If the seller refuses to exclude a concerning clause, borrowers have one of three choices: accept the risk, walk away, or limit the clause to a specific event.

How Can Lenders Assist?
As homebuyers encounter these situations, lenders can serve their customers in several ways:

1) In the prequalification stage, ensure potential homeowners are made fully aware of the clause, its use, and the potential risks. Lenders can also inform buyers of their rights to cross out verbiage within the fine print of a contract.

2) If the contract is already signed and effectuated, lenders can emphasize to their underwriters to search the contract for any convenience statement, or utilize pre-closing loan administration solutions, such as the Collateral Assessment Review, which ensures the building “idea” and associated documents are sound in order to mitigate risks after construction begins.

During a Collateral Assessment, the contract is fully vetted and reviewed, and if unfavorable conditions exist, Trinity notifies the lender so further communication can occur with the homebuyer. While never ideal to cancel a pending construction contract, it may be in the homebuyer’s best interests to terminate the agreement before significant loss occurs.

For a full description of Trinity’s Loan Administration Services, read this article and for more information, please feel free to contact us. We’d love to help.