How Do We Define a Breach of a Real Estate Contract?
A breach of contract occurs when one party to the contract does not meet their obligations, and the other party suffers some kind of loss as a result. In most real estate contracts the buyer has an obligation to meet certain deadlines. He must provide earnest money, financing approval, property inspection amendments, purchase agreements, Title insurance, and others that may apply to a particular transaction, such as Homeowners Association disclosures, Home warranties and LEAD paints disclosures. If a buyer fails to provide all of these documents by the contractual deadlines , he has breached the contract, which gives the seller the right to terminate the contract and keep the earnest money deposit. In terms of the seller obligations, the contract stipulates when the seller must deliver possession and transfer title to the property. If the seller does not do so, the buyer can terminate the contract and claim damages. The earnest money is usually treated as damages. It is important to consult a Real Estate attorney in Colorado as there are some exceptions.
Why Does a Buyer Typically Breach a Real Estate Contract?
There are a variety of reasons that a buyer might back out of a real estate transaction. The buyer may have run into unexpected financial difficulty, or perhaps the buyer is not comfortable with the price for the property and elects to not follow through with the purchase. Of course, the buyer backing out is not uncommon when there are additional issues discovered with the property via an inspection, a mortgage not being secured, or lack of title.
Some examples of all these reasons are below:
Money
Let’s say a buyer finds a great deal on a house and puts together a sales agreement with a relatively short close date. The seller is in a rush due to an interstate move and agrees to the short date. However, when the buyer attempts to secure financing, they find out their credit score is more than 20 points lower than they expected due to a missed credit card payment several months earlier. The bank declines the loan for not being able to provide the money on time to close.
Buyers remorse
Perhaps the buyer secures the financing but is looking at the property and worried it’s an "offer too good to be true." On occasion a buyer gets cold feet and decides it would be better to walk away from the deal regardless of ongoing contract obligations.
Inspection issues
Let’s say a buyer makes an offer on a property in a competitive market well below the asking price. The buyer demands an inspection immediately at the buyer’s expense, and the inspection uncovers significant trouble: standing water in the basement, cracks in the foundation, and issues with the roof. The costs of repairs are estimated to be in the tens of thousands. The seller is unwilling to address the problem, and the buyer backs out.
Breach of a Real Estate Contract Presents Legal Issues
If a buyer were to breach a real estate contract, and in this case, an earnest money contract (in other cases, a purchase and sale agreement), by failing to purchase the property, there both civil and criminal repercussions. The buyer could be sued for specific performance. Specific performance is simply a lawsuit requesting the seller or the buyer perform what they agreed to do in the contract. This is occasionally referred to in general terms as specific performance. It means to ask a court to enforce the contract as agreed to by the parties in writing. Essentially the court orders the buyer to go forward with the sale of the property and take certain actions to complete the sale. Specific performance is the most common form of remedy for a breach. The buyer would also be liable for earnest money damages (em) as agreed to in the contract. The seller is entitled to this the moment the buyer breaches. There is no requirement that the seller sell the buyer’s property. However, a seller does not have to take less than they agreed to take. If they can get more for the property in the current market, they should be able to do so without penalty to them. Buyer would also potentially be liable for consequential damages. If, as a result of the buyer’s actions, the seller is put in a position that causes them to suffer intentional damage to their credit or their ability to buy another property, lost business revenue or similar monetary damages, the buyer will also be liable for these damages. The buyer may also face exposure to criminal prosecution depending on how buyer defaulted on the contract. Their activities may have breached criminal laws such as fraud, larceny, perjury, forgery, bribery, and extortion. Whether they actually are prosecuted or not is solely at the District Attorney’s discretion. Even if the buyer is not prosecuted for criminal activity, but their conduct meets the requirements to prosecute for a crime, the crime is simply reported for the future. Since criminal records are normally public records, buyer will have difficulties securing financing and perhaps even a license to do business. The buyer would also still be liable for payment of all the closing costs in addition to deposit money which is considered em. This typically happens in primarily commercial transactions when buyer purchases an office building and spends money for tenant improvements before buyer defaults. Criminal consequences are included here, although commercial real estate brokers have very little exposure to this.
Breach of a Real Estate Contract: Seller’s Rights
The next consideration after a breach of real estate contract by buyer is what are the seller’s remedies for breach of contract?
Just because the buyer has breached doesn’t mean there aren’t issues for the seller. Let’s take a look at a couple of possible options under Texas law.
The seller is entitled to receive earnest money if a buyer breaches the contract. Is that a windfall, or is it just the money that was paid as a good faith deposit under the terms of the contract?
If the earnest money is not enough to cover the damages, the seller may sue to recover any damages caused by the breach. The seller may have been counting on the proceeds of the sale to pay off a mortgage or to invest in other property or to move into a new home. The earnest money may just be a small portion of the damages .
If the buyer refuses to close again after the seller has changed the closing date in the contract to another date, the seller has several options, one being that the seller may compel the buyer to specifically perform the contract of sale so that the sale may occur, and the remedy is called "specific performance." However, if the house has been damaged by a storm between contract negotiations and closing, the seller may more likely to use the earnest money deposit remedy and pursue damages for breach of real estate contract by buyer than seeking specific performance.
One thing to note, too, is if the seller allows the buyer to keep the earnest money, the seller can still pursue other damages even if the earnest money is stated as liquidated damages in the contract.
As with most legal questions, the answer of what the seller should do when the buyer breaches a real estate contract is subordinate to what the parties agreed to in the contract.
As a Buyer, How to Prevent a Breach of Real Estate Contract
For instance, you will want to ensure that your financing is firmly in place with your mortgage lender and that you have the required down payment readily available. Additionally, you should keep any contingencies needed such as appraisal or home inspection contingencies. These types of contingencies give you greater flexibility in knowing that if something unexpected happens you likely have a right to back out of the contract and receive your money back. However, it will depend upon the wording of the provision that you talked about with your attorney and your creditability in the real estate community. Many sellers will not even entertain your offer if you can’t show that you have your financing in order. Also even having your inspection can make a difference as to the terms you can negotiate for your final purchase price, so keep these in mind. That said, there is always room for negotiation, and you need to protect yourself to best safeguard your interests in the deal.
Buyer’s Breach of a Real Estate Contract May Hurt the Market
The impact of buyer breach on the overall real estate market is another matter. The dissolution of the contract releases the seller, but leaves the purchaser with an empty hand. The buyer’s losses are concentrated and often quickly rectified, once the market for the property improves. On the other hand, the sellers in a particular buyer’s neighbourhood may lose confidence in the continuing success of the market because of the breach of contract of a few purchasers. The future of the affected purchaser may be indeterminate, where the purchaser had marginal financial resources and depended on the sale of the property to carry the mortgage. A fair number of buyers who default on their real estate contracts have limited buying power and they tend to flood the market when they try to resell their property. The multiplicity of similar distressed sales drives down the market value of such property. A property bought with the intention of holding it for a few years and then selling it at a profit might easily be sold at a loss. This can be a disincentive to potential sellers , and add to market instability. Along with the decline in property values, deterioration of the physical structures may occur. Real estate left abandoned in the foreclosure process runs the risk of vandalism, whether it is from the initial buyer, or from other homeless squatters. Squatters cause damage by removing fixtures, setting fires and stealing contributed landscaping. Especially where the law clerks see large numbers of lost sales in particular neighbourhoods, it becomes important that title companies and financial institutions take steps to limit distress in the economy.