When you find the perfect lot to build your dream home, it’s an exciting time. You spend hours reviewing floor plans and picking the right finishes for your new home. After finding the perfect builder, you sign a contract and put down a deposit. But did you know that the builder can increase the contract price or cancel the deal even after you sign a contract?

It’s true! A builder’s right-to-terminate clause is in the fine print of most new home builder contracts. Also called a cancellation or convenience clause, it means the builder can change the previously agreed-upon price or simply back out of the deal. So what does this mean for you?

In this blog post, we’ll discuss the fine print called the “builder’s right to terminate clause.” We’ll also see when a builder can legally increase your contract price and whether they can cancel it entirely!

What is a Right to Terminate Clause?

A Right to Terminate Clause, or RTC for short, gives home builders the right to cancel a contract at any time during the construction process. This clause is often tucked away in the fine print of most builder contracts, and homeowners easily overlook it.

The reason why it’s essential to understand this clause is because you could be stuck paying a higher price or having to start from scratch with another builder.

Some clauses only include limited circumstances, while others allow builders to back out of a building contract simply because it’s convenient for them. Whether you’ve signed a fixed price contract or not, construction contract codicils often leave room for material price increases.

When planning to build the home, the builder’s contract takes into account

  • Increased costs for material prices
  • Lumber prices
  • Labor increases
  • Unforeseen circumstances
  • Price adjustments for materials or labor
  • Increased price for other construction costs
  • Supply and high demand for housing can bring a contractor higher pay than the original construction contracts.

According to CBS News, “Citing an ‘unprecedented’ increase in costs, in the past year several North Texas builders have canceled contracts then sold the houses for more on the open market.”

In other words, a builder increases the price trying to entice other buyers to pay more.

When Can A Builder Terminate?

Builders can terminate a contract if they feel the construction cost will exceed what was initially agreed upon in the original contract. This often happens when a homeowner wants to add additional features to the home, such as a larger kitchen or upgraded flooring. The builder can legally terminate the contract and look for another buyer when this happens.

The other common scenario is when there are unexpected changes in material costs or labor costs due to market conditions. This can cause the builder to want to renegotiate the contract price. And if a homeowner is unwilling or unable to agree to the new terms, the builder can terminate the deal.

Why Would A Builder Terminate?

Builders may terminate contracts for a variety of reasons, such as rising costs due to:

  • Unexpected changes in labor or materials prices
  • Changes in construction plans due to the homeowner
  • Looking for a different buyer than the one they had when they started building for the job.

In some cases, builders may terminate contracts if they feel that a homeowner cannot make timely payments or is not financially qualified. This could include situations where a homeowner is denied financing due to credit or income issues or cannot make timely payments during the construction process.

How Much Can A Builder Increase The Contract Price?

In Texas, a builder can increase the contract price by up to 10 percent without needing homeowner approval. Any increase beyond that requires written consent from the buyer.

In some cases, a builder may offer to waive some of the cost increases if a buyer agrees to certain concessions, such as reducing the number of upgrades or features.

What Are Your Rights If a Builder Terminates?

If a builder terminates your contract, you have the right to receive back all funds you have paid for deposits and payments made toward construction. However, the builder will return this money to you without interest!

You also have the right to pursue legal action, although this is often not helpful and can be costly. It makes more sense to talk with a real estate attorney before signing any contracts for new home construction.

Bottom Line

Before signing a contract with a home builder, it’s essential to read the fine print and understand the terms of the agreement. Be sure to look for any clauses giving the builder the right to terminate the contract and be prepared to negotiate if necessary.

In most cases, builders will try to work with homeowners before terminating a contract but make sure you know your rights in case of unexpected termination.

Because of the extreme demand for homes in 2022, builders can often afford to terminate contracts and profit from a price increase.

No one wants to end up in a costly situation waiting for home construction to finish and then face builder cancelation. That’s why it’s crucial to talk with your real estate attorney about your contract.

While most contracts have a “cost plus contract” clause allowing for an increase in cost due to materials price increases, not all builder contracts include convenience clauses allowing a builder to cancel altogether for no good reason after you’ve signed.

Our Experienced Real Estate Attorneys Can Help

At Jarrett law, our experienced real estate attorneys help you understand your rights and responsibilities under home builder contracts. Our team can review legal real estate contracts and ensure they are legally binding, protecting both you and the builder from potential misunderstandings or disputes.

Contact us today for a free consultation. We’ll ensure that all parties know their rights and obligations so you don’t have to renegotiate or terminate an agreement due to unexpected changes.

We look forward to helping you with your real estate legal needs!