What is Breach of Contract in Real Estate?
A breach of contract by the buyer occurs if they do not perform their obligations under the agreement. The most likely breaches by a buyer tend to be closing on the agreed date, however there are many types of breaches which occur throughout the life-cycle of the agreement . One such breach is when the buyer fails to obtain proper financing, or fails to timely obtain sufficient financing. If the agreement is an as-is agreement, which is very common, the buyer will not be able to breach the agreement, and therefore forfeit their deposit, unless they materially breach some other obligation under the agreement.
Buyers Breaching Contract: Legal Ramifications
When a buyer breaches a real estate contract, the legal consequences can be significant. If the purchaser is in breach, the seller may have legal claims against him or her. The contract itself can provide for penalties and/or the recovery of damages should the purchaser default. Such penalties include the forfeiture of the initial payment, late fees and breach-of-contract damages, such as the difference between the contract price and the fair market value of the home. Depending on the severity of the breach and the language within the contract, it may be possible for the seller to retain the initial deposit as liquidated damages or be entitled to additional monetary compensation. Some contracts may also stipulate that if the home sale does not go through for any reason not related to a default by the purchaser, the seller will be entitled to the forfeited earnest money as a result of a purchase, sale or other transaction of the home which would have interfered with the proposed sale. Liquidated damages generally provide a convenient means by which to limit exposure and actions for claims of specific performance (an order compelling the buyer to go through with the proposed purchase) and other substantial damages. Although liquidated damages are certainly enforceable in the vast majority of jurisdictions, if they are deemed a penalty under the law, unreasonably onerous or oppressive, courts may refuse to enforce them. If the breach did not result in a stay in the closing and the deal goes through, it is still possible for the seller to bring the breach against the buyer. The seller may be able to sue the buyer to recover the costs of repairs, the diminished value of the house, lost rents (if the property was a rental), lost profits and other enumerated damages in the contract. Should the parties be unable to settle their dispute after the breach, either one may file a breach of contract action against the other. However, it is worth noting that, whenever possible, it is preferable to resolve the dispute amicably by way of negotiation and/or mediation so both sides can avoid the cost and uncertainty of litigation, since any damage award in a property dispute may fall short of full compensation. Although both options are nonbinding, mediation offers the benefit of the opportunity to try to reach a reasonable solution before commencing or continuing litigation, while arbitration may save both parties the time and expense of a trial. Courts encourage settlement of disputes and many contracts call for the parties to attend mediation prior to commencing litigation. While neither allows for the imposition of damages, they do allow the parties to settle the matter without the burden of litigation, provided that they can agree to the resolution of the issue. Most brokers will look out for their clients’ best interests to avoid a breach of contract issue. They will attempt to resolve issues with the buyer’s agent when a default is threatened if being unable to perform. Ideally, the buyer’s agent should thoroughly prepare the purchaser before the transaction so there are no unexpected surprises that could result in a breach of contract.
Buyer Breach of Contract: Seller’s Options
Upon breach of contract by the buyer, the Seller has several remedies. The Seller can retain the earnest money as liquidated damages. If the amount of the earnest money is small and a seller elects to accept the benefit of the advance payment of the earnest money as liquidated damages, the amount would need to be reasonable. In other words, it cannot be so disproportionate to the sum of money a seller could have received had he/she accepted the offer without any breach of contract. Therefore, if the seller knows that there is a good likelihood that the buyer will not close and the seller’s damages will be substantially greater than the earnest money, the seller should not accept the earnest money as liquidated damages.
The contract may provide that the earnest money will be liquidated damages to the seller in the event of the buyer’s breach. However, even in the event of a breach, the seller may not be entitled to liquidated damages. In that case, the seller may elect either (a) to attempt to enforce specific performance of the contract or (b) pursue an award of actual damages.
Specific performance is an equitable action that requires the breaching party to perform specifically what was promised under the contract. Specific performance may be used as an alternative to an award of actual damages. Specific performance may be the best choice where the seller can prove (1) an agreement exists that is clear and certain and (2) other remedies are inadequate. Specific performance is not available if the remedy at law is adequate.
Should the buyer reject the offer of specific performance or fail to perform specific performance within the period set by the court, then the court may grant a decree for the sum of the purchase price or such a lesser sum as the merits of the case may justify.
An award of actual damages may be used as an alternative to an award of specific performance. However, a court will not award actual damages when special value is attached to the property, such as when the property is unique or one of a kind, or when the property is not readily obtainable in the open market. If an award of money damages will "make good" the aggrieved party’s loss and "place the injured party in a position as favorable as he would have enjoyed had the contract been performed," then the proper remedy is an award of money damages. However, adequate compensation must be available from which the amount of the damages may be computed or the ability to compute them is lacking.
They key takeaway is that there is no one correct remedy to a breach of contract.
Why Do Buyers Breach Real Estate Contracts?
As skilled real estate lawyers in Toronto, we’ve seen a number of situations where our clients have been faced with Breach of Contract by Buyer issues. Understanding what can cause such breaches is important if you find yourself in a cancelled deal situation. Having worked with countless clients, the most common reasons we see for buyers breaching a contract are as follows:
Financial Difficulty
There isn’t always a clear reason as to why a buyer may have trouble affording a home, but in the current market it’s becoming a little clearer. In most cases, the new cost of raising interest rates has an impact on their overall budget. Suddenly the mortgage payment exceeds the limits of the anticipated monthly payments. A sudden property tax increase on the property may also push them over their budget. Without factoring such additional payments and expenses into their initial calculations, it seems like the sudden cost of home ownership just went up overnight.
Cold Feet
Sometimes buyers feel pressured into their decisions. Whether it was the pressure of a heated market and bidding wars , or peer pressure from friends and family telling them that this is the "perfect" home for them, the buyer may bow to their desires outside of their means. Once the ink is dry and the dust settles, they start to realize that this house may not be right for them after all.
Deceiving Photos
For the sake of argument, most of us have seen photos that don’t quite match reality. We would certainly expect a real estate listing to be more accurate than what you might find on Kijiji. However, there’s a lot of truth to the saying "you don’t know what you don’t know." The fact is, some sellers may attempt to hide problems with photos that don’t quite match a room’s position or angle. Others will attempt to mislead the buyer by collecting all the junk in their basement and storing it behind a wall. With enough discretion, the seller can also make poor spots in the home look like they stand on a hill with a view of the sunset, when they really sit on a busy street directly across from a gas station.
How To Avoid Breach of Contract as a Buyer
Buying a home is an investment, and in New York, we have a long-standing tradition to perform "due diligence." All kinds of things must be checked out, from the financial to legal and physical aspects, that could result in harm to the buyer. And this should all be carefully documented.
Due diligence in real estate matters is generally focused on conducting a thorough inspection and securing proper financing. These can be relatively minor issues if something is overlooked, or they may seriously costly ones. For example, if the buyer didn’t get the roof inspected and there’s an issue up there, you may be talking about significant costs to achieve repairs or even having to default on your mortgage.
Since real estate is not typically covered under a home warranty, paying for repairs of a physical nature to the property is the owner’s responsibility. Approval for your mortgage may require a home appraisal, and improper inspection may jeopardize the lender’s ability to collect on the mortgage if you then default. Doing due diligence will protect the buyer should the purchase transaction fail due to an issue the buyer was unaware of during the sale contract negotiations.
There are also other significant issues that protect the buyer against being in breach of a sale contract, such as financing contingencies. Any contingencies from a financing perspective should be properly documented in the contract to protect the buyer from breach.
Buyer Breach of Contract Examples
While breach of contract claims are common in residential real estate, not all breaches are easy to prove in a court of law under Texas law. Here are some recent real life examples where buyers breached contracts and how the cases were resolved.
In a case decided by the Court of Appeals for the Houston 1st District, the homeowners executed a contract with a Houston homebuilder to build a custom home at a cost of $2,348,575. The builder completed the home in July 2007, closing the sale of the home on September 25, 2007. On October 22, 2007, the homeowners sued the homebuilder for breach of contract and negligence with respect to aspects of the construction and purchase of the house. The homeowners alleged that the driveway had not been repaired; the wrought iron rails around the patio were improperly installed; and there was cracking at the seams of the stucco. The trial court granted the builder’s motion for summary judgment as to all claims. The homeowners appealed the denial of their negligence claim as to the defective drive way. The Court of Appeals affirmed the summary judgment. In reaching this conclusion, the Court noted that the driveway gradually lowered from the entrance to the garage, causing water pooling. The pool of water caused cracks in the concrete, which in turn caused the driveway to slope away from the house, resulting in water intrusion into the house. The Court of Appeals found that the alleged changes in the driveway "were merely consequential damages flowing from the breach of performance." The Court held that the cost of repair on the house resulting from the defective driveway was "consequential damages" to the breach of purchase contract. Because the homeowners were not the original parties to the driveway contract (the builder entered into the contract prior to executing a sale contract with homeowners), the Court concluded that the improperly installed driveway was a "consequential damage."
In an April 2016 case, H & H Tire executed an assignment appointing its attorney-in-fact sole purchaser and owner of Property; H & H Tire agreed that if it defaulted or failed to fulfill its obligations , the attorney-in-fact may cancel the contract and retain any funds thereunder and retain the property. American Bank wired funds to the seller’s attorney, which were held in escrow and not paid until the attorney received all documents required for closing; part of the documents were never delivered. The attorney then retained the escrow account, but H & H Tire failed to subsequently deliver Part 1 and Part 2 documents to the Seller/Attorney. The trial court, finding that the Seller/Attorney did not intend to agree to a final contract, ordered rescission of the sales contract and forfeiture of the original payment. In upholding the trial court, the Court of Appeals stated that the Seller/Attorney had a reasonable basis for believing no enforceable contract existed – H & H Tire had failed to comply with the contract by printing the property’s legal description, H & H Tire never made any payments directly to the Seller/Attorney, and both parties were aware of the need to complete Part 1 and Part 2 documents, which were never delivered.
In Stowell v. Luce, the buyer purchased a home for $205,000 but failed to obtain financing and timely close; seller terminated the contract and sued buyer for breach of contract. Buyer filed counterclaims, but was ordered to pay the full price plus interest and attorney fees. On appeal, buyer lost. The Court of Appeals held that the words "Time is of the essence" in the contract were specific enough to notify the buyer that time was a material part of the contract and that the seller could terminate if the buyer failed to close timely.
These case studies shed light on the nuances in residential real estate that can shape a judge’s determination as to whether one party is liable for breach of contract. The appeals courts have weighed in on circumstances too numerous to list here, but any one of them could be relevant in a current or future case. Any real estate attorney will tell you that the outcome of each case is particular to the facts as applied under the law, and these cases illustrate this point appropriately.
+ There are no comments
Add yours