Real Estate

How Breaches of Real Estate Sales Contracts Play Out in Residential Home Sales

By Ilona Bray, J.D., University of Washington Law School
Understanding when the collapse of a home sale deal may, under the terms of the contract, provide for either cancellation of the contract without consequences, or for legal remedies to the disappointed buyer or seller.

A real estate purchase agreement or contract of sale contains many terms and conditions of sale. Both parties have a lot of tasks to handle between the date the contract is signed and the date the deal closes, typically a period of 30 to 45 days.

If the seller or buyer fails to comply with the terms or conditions contained in the contract—perhaps the seller fails to provide clear title to the property, for example—that party is said to have breached or defaulted on the agreement. The other party may then have a legal claim against the breaching party.

Similarly, if one of the parties cannot meet a contingency of the contract, such as the buyer failing to obtain financing, the parties will be released from the contract.

If a dispute arises between the parties to the sale, they must use the dispute resolution process indicated in the contract, which may require them to resolve the matter without going to court.

Terms and Conditions Found in Real Estate Purchase Agreements

Typical purchase agreements and contracts of sale contain many (that is, pages and pages worth of) terms and conditions to which the parties have agreed, such as:

  • the home's purchase price
  • a legal description or precise address of the property
  • date the sale will be finalized ("closed")
  • date the buyer will move in ("take possession")
  • items to be included in the sale, such as carpeting, lighting fixtures, appliances and so forth
  • items not included in the sale that the buyer might otherwise expect to be (such as a fixture that the seller has negotiated to take along)
  • guarantee that the seller will provide clear title to the home, through an abstract of title, certificate of title, or title insurance policy, and
  • a provision that the seller is responsible for paying house-related expenses through the closing date.

If the party who is responsible for complying with the specific term or condition fails to comply, that party has breached or defaulted on the contract.

For instance, if the seller fails to provide an abstract of title showing clear title to the property, the seller has breached the agreement. Also, if the seller takes lighting fixtures which he or she had agreed to leave, the seller has breached the agreement.

In such a breach, the buyer may have more than one legal option. For example, buyer who is determined to see the sale go through might agree to a modification of the contract as to the title or the lighting fixtures and the price, or simply complete the home sale and then file a claim against the seller for breach of contract.

If the parties can't agree on how to resolve the matter, the parties must use the dispute resolution process if one has been included in the contract. Usually, this is arbitration, mediation, or small claims court. Such alternative methods for resolving disputes are usually less costly and more efficient than filing a traditional lawsuit. The parties submit the matter to the arbitrator, mediator, or judge, and that person decides which party breached the contract.

Sales contracts often provide for liquidated damages if one party or the other breaches the contract and the sale is canceled. This means that the damages to the party not in breach of contract will be for a set amount of money, which is often the amount of the buyer's deposit or earnest money.

Contingencies in the Real Estate Purchase Agreement

Purchase agreements and contracts of sale typically contain several contingencies that must be met in order for the sale to proceed. Both buyer and seller will likely want to add various contingencies in order to protect their own interests. These contingencies often include:

  • the buyer hiring a home inspector and being satisfied with the results of the resulting home inspection report
  • the buyer successfully obtaining a mortgage loan or other financing
  • the buyer selling his or her current house, and
  • the seller successfully finding another house to move into.

If the contingencies of sale are not met; for example, the buyer is turned down for a bank loan; the buyer and seller can cancel the contract and the buyer can get a refund of the earnest money deposit (called a downpayment in New York).

In the event of a dispute between the buyer and seller on the matter of contingencies, they would have to turn to any dispute resolution process specified in the contract. An arbitrator, mediator, or small claims court judge would then decide the matter according to the provisions of the contract.

Dispute Resolution Requirements in Home Purchase Agreement

Purchase agreements and contracts of sale often contain provisions specifying the kinds of dispute resolution that the parties agree to follow if they disagree on the performance of the sales contract. These can include:

  • Arbitration. This process involves the parties submitting the dispute to an individual, the arbitrator, who is not a court officer and who decides the matter. In "binding arbitration," the parties are bound by the arbitratation award and are not entitled to a court's review of arbitrator's decision, except under extremely limited circumstances.
  • Mediation. This is a process in which a neutral third party guides the disputing parties and helps them find a mutually agreeable solution to the problem. If mediation fails, the matter may proceed to court.
  • Small claims court. This is a division of a county court in most U.S. states, with authority to hear lawsuits in which the amount in dispute is less than a set figure, such as $7,500 in Colorado and $5,000 in Michigan.

If your home purchase contract does not include dispute resolution provisions, you can agree to settle the dispute through arbitration or mediation, or file a lawsuit in civil court.

If you have any questions about disputes concerning a real estate purchase agreement or a contract of sale, contact a real estate attorney in your area.

Questions for Your Attorney

  • What happens if the seller of property fails to fulfill the promise to provide clear title to the property?
  • Can the seller require me to apply for financing from certain lenders in order to meet the financing contingency of the sales contract?
  • Is suing the seller over the return of my security deposit worth the costs and effort of a lawsuit?
  • If the matter can be settled in small claims court, does our state's law allow me to have a lawyer represent me?

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