Last updated October 27, 2022
What is a Termination Agreement?
A Termination Agreement is a legal document that parties use to mutually cancel a contract. It can cancel all sorts of contracts, including those that pertain to leases, services, loans, sales, and employment.
When parties terminate a contract, they give up all their contractual rights and obligations, which means the parties are no longer required to comply with what they needed to do under that contract.
A Termination Agreement is also known as a:
- Cancellation of contract
- Termination of contract
- Contract cancellation agreement
- Dissolution of contract
How does a Termination Agreement work?
As its name suggests, a Termination Agreement is an agreement between the parties in a contract—not a document signed by a sole party. It is a mutual agreement.
In this case, mutuality doesn’t necessarily mean all parties are happy and satisfied regarding the canceled contract. It only means that all parties are willing to sign the Termination Agreement and release each other from their obligations.
Generally, legal obligations arising from legislation can't be waived which can be relevant in some contexts like leases and employment.
Termination Agreements differ from documents like Eviction Notices and Employment Termination Letters, which allow landlords and employers to end contracts on their own without a tenant’s or employee’s agreement.
Why is it important to use a Termination Agreement?
When you just walk away from a contract without formally canceling it, you are vulnerable to claims that you wrongfully failed to perform your agreed-upon obligations.
It’s always a good idea to safeguard one’s interests by ensuring a release of all claims and liabilities. The best way to ensure this release is through a Termination Agreement.
When to use a Termination Agreement
Termination Agreements help parties terminate contracts early or terminate contracts that don’t have a defined ending. Parties use Termination Agreements for all sorts of reasons.
However, as previously mentioned, Termination Agreements can only be used when all parties are willing to sign and consent to cancellation.
A Termination Agreement can be used in various situations, including the following:
1. Terminating a Lease Agreement
Sometimes landlords and tenants have to cancel their Lease Agreements.
Most of the time, leases don't end by mutual agreement. However, when they do, a Termination Agreement may be useful.
When a landlord and tenant use a Termination Agreement to cancel a residential or commercial lease, they give up their rights and release each other from all their lease obligations.
More specifically, tenants give up their right to occupy a rental property and are released from their obligation to pay rent. If multiple tenants are signed to the lease, all of them must agree to the Termination Agreement for it to be valid.
Landlords give up their right to collect rent payments and are released from leasing their rental property.
Please note, while a Termination Agreement relieves the parties of their contractual obligations, it doesn’t waive any legal obligations created by local, state, or federal law.
Remember, only use a Termination Agreement if you and the other party end a lease by mutual consent. Without mutuality, parties should use an alternative document. Consider the following situations:
- When tenants need to inform their landlord that they will vacate the rental property at the end of the lease term, they use an Intent to Vacate Notice.
- When a tenant has grounds to end a lease early and informs the landlord that they are canceling the lease immediately, they use a Termination Notice.
- When a landlord has grounds to end a lease early and evicts a tenant, they use an Eviction Notice.
2. Terminating a Service Agreement
You may find a Termination Agreement helpful if you’re a client or self-employed service provider who needs to end any type of Service Agreement. Service providers include freelancers and independent contractors.
When service providers and clients use a Termination Agreement, they can sign it and walk away knowing that the other party has released them of their obligations.
Sometimes, clients hire a service provider for a specific task, such as a homeowner hiring a contractor to renovate their kitchen. Other times, clients hire for a fixed term, such as a parent temporarily hiring a nanny. In these cases, a Termination Agreement can cancel the contract early.
If clients hire a service provider indefinitely, such as a homeowner hiring someone to clean their home weekly, a Termination Agreement helps the parties put a definitive end to the contract when they are ready.
3. Terminating a Loan Agreement
Suppose one party lends money to another and they document the arrangement with a Loan Agreement. Ideally, the borrower pays back the loan and both parties are satisfied with the outcome of the contract. However, things don’t always work out.
If a lending arrangement isn’t working out and both parties agree to end it, they can use a Termination Agreement to cancel their Loan Agreement. The same goes for loans established through a Promissory Note.
Suppose you obtain a loan from a family member to buy a house but the real estate purchase ends up falling through. Maybe you decide you’ll rent for a while and put off buying a home. In this case, you may want to return the loan amount and terminate your Loan Agreement. In this case, you could draft a Termination Agreement for you and your family member to sign and transfer the loan amount back to them.
The Termination Agreement will ensure that you and your family member are both free from any loan or payment obligations.
4. Terminating a purchase
Sometimes sales fall through, whether they are for real estate, personal items, businesses, or shares.
Once a buyer and seller sign a contract binding them to a specific sale, they are obligated to follow through with it. However, depending on the situation and relationship between the parties, they may agree to cancel their contract with a Termination Agreement if necessary.
For example, a homebuyer may agree to buy a house and sign a Real Estate Purchase Agreement with the seller before being approved for a mortgage. Suppose the buyer ends up not being able to afford the home. The seller may agree to sign a Termination Agreement so they can sell to someone else.
The same goes for Sales Agreements, Share Purchase Agreements, and Purchase of Business Agreements. Through a Termination Agreement, parties can determine the terms of cancelation, which may or may not include returning a deposit. The Termination Agreement ensures the buyer is off the hook and the seller can sell to a different party.
5. Terminating an Employment Agreement
Generally, it’s either an employee or employer who ends a working relationship. However, sometimes the parties mutually agree. In that case, a Termination Agreement is useful in canceling an Employment Contract.
Please note, a Termination Agreement is different from an Employment Termination Letter which employers use to fire staff. Unlike a Termination Agreement, an Employment Termination Letter does not require an employee’s signature.
A Termination Agreement is a useful tool mostly for employers because it ensures their release of all obligations outlined in the Employment Contract and creates a record of an employee's last official day.
Please note, employers are still required to follow all applicable laws regarding their employees. Some rights can be waived, but not all can.
6. Other instances
Many other situations can benefit from a Termination Agreement. For example, Termination Agreements can be helpful in the following circumstances.
How do you write a Termination Agreement?
To write a Termination, complete the following steps:
- Provide the names and mailing addresses of each party involved.
- Provide details from the original contract. Include the date the contract was signed and the purpose of the original contract.
- Select a termination date after which the contract will no longer be in effect. You can choose today, the signing date of the termination agreement, or a date in the future. If you’re not sure about the date, select “Unsure” and fill it in later.
- State if either party is providing compensation as part of the Termination Agreement. If so, select the party providing compensation and state the compensation they are providing.
- Select the date the involved parties will sign the agreement.
- Determine if you require witnesses to sign the agreement.
When does a Termination Agreement become effective?
Generally, a Termination Agreement becomes effective on a date specified by the parties involved in the agreement. Or, a contract can become effective upon signing the document.
If you intend for the agreement to become effective by some other trigger, you'll need to add copy to the document using the document editing tool.
