Buying or selling a home can be a stressful process, filled with uncertainty. The time between the execution of the purchase contract and the closing (the formal moment when title transfers) is especially fraught. Either the buyer or the seller might develop "cold feet" and try to escape from the sale. In such a situation, can one party force the other to proceed to closing the deal?
How a Property Closing Might Fall Apart
Why would a buyer or seller suddenly get "cold feet" after signing a purchase contract? There are many potential scenarios. Before delving into the law, we must first consider the wide range of possible fact patterns.
First, imagine you're a buyer, looking to purchase a new home for your family. You find a house within your price range that fits your needs. The seller accepts your offer, and you both sign the sales contract, with the closing to occur within several weeks. But then you find another house that's even better, right across the street, and for a lower price. Or perhaps your home inspector comes back with a report noting significant mold in the basement, which requires remediation. Or you learn that a garbage dump is scheduled to open nearby next year. Suddenly, you wish to back out of the sale.
Or, let's consider a scenario from the seller's perspective. You repair and fix up your home, find a listing agent, hold open houses, receive one or more bids, and finally accept an offer. You expect to move to another state for a new job, and have made plans to move. After the purchase contract is signed but before the closing, however, you receive another offer significantly higher than the one you accepted. Or perhaps the job falls through; the company goes bankrupt or decides to keep you stationed in your current location. Suddenly, you wish to back out of the sale.
What happens next? Can the party who wants the deal to go through stop the other party from wiggling out of it?
Legal Background on Real Estate Contracts
A real estate purchase agreement (sometimes called a "purchase contract" or "contract of sale") is a binding contract, like any other, if it has been executed by both the seller and the buyer, and if the buyer has given the seller a deposit (known in legal parlance as "consideration").
The parties are obligated to meet the terms and conditions of the contract and to take the actions that they agreed to in the contract. In some situations, these actions will lead to the contract being canceled for reasons that do not constitute a breach.
What would be an example of such a situation? Many purchase contracts include "contingencies," including one specifically conditioning the sale on the buyer being reasonably satisfied with the results of the inspection. If the inspector tells the buyer that the home has a mold problem, the buyer would have a reasonable basis to revoke the contract (cancel it, because neither party is required to perform).
However, if either party fails to perform under the contract for a reason that is not permitted by its terms, the other party can obtain certain kinds of relief, called remedies. There are two primary types of relief that courts will award: (i) money damages and (ii) specific performance.
Money damages are the most common type of legal remedy in a home purchase situation. They compensate the injured party for the financial consequences of the sale falling through. The buyer, for instance, could sue the seller for all of the costs put into the transaction, including a return of the deposit (with interest), as well as the costs resulting from any missed time and opportunities.
Specific performance is another possible remedy in this situation. It's sometimes called an "equitable" remedy, because it involves a court using its discretion to order the nonperforming buyer or seller to perform and to complete the contract as if it had never been breached—that is, to sell or buy the house.
This remedy is less favored by many states' courts. It is a somewhat rare and extraordinary remedy. In the most extreme case, it could lead to someone being forced to sell their home against their wishes.
On the other hand, courts do acknowledge that where one person's object was to buy or sell a property, mere money damages will not always be sufficient to rectify the breach. This is because real estate, unlike most other types of goods, is fundamentally unique. No two homes or pieces of land are precisely alike, meaning that it is difficult for money to exactly approximate the loss faced by the non-breaching party.
If you choose to seek specific performance as a remedy, you will likely not be also able to seek money damages. While each state's law is somewhat different, you must typically choose between these remedies.
When Home Buyers Can Use Remedy of Specific Performance
If the property seller is able to perform the various promises made in the contract, but is simply unwilling to do so, the buyer may bring a lawsuit for specific performance. The courts might grant this in recognition of the fact that each parcel of land is unique and that a monetary award would be inadequate, in which case the court will order the seller to convey the property to the buyer according to the terms of the contract.
A buyer may also obtain specific performance when the seller cannot convey all of the property covered by the contract, such as when the parcel owned is smaller in area than that agreed to be sold, or when additional defects in title are uncovered. The seller may be compelled to perform to the extent possible, with an abatement (reduction) of the purchase price to compensate for the defect or deficiency. The amount of the abatement is usually equivalent to the value of the property not conveyed.
Once a lawsuit is underway, the real estate buyer may file a legal document known as a "notice of pendency" to prevent any transfer of the property to a third party until the claim has been resolved. The notice is sometimes called a notice of lis pendens, and is usually filed in the county clerk's office. The effect of filing this notice is that the seller will be unable to sell the property to another buyer while the lawsuit is ongoing.
To obtain specific performance, the buyer must show that he or she was ready and able to perform at the closing. Most importantly, this means that the buyer must show that he or she had appropriate financing, whether in the form of cash or from a lending institution.
When Home Sellers Can Use Remedy of Specific Performance
If a buyer decides not want to go through with a sale, the seller may file a lawsuit for specific performance of the sales contract. The theory is that a symmetry should be upheld between the remedies available to a buyer and a seller. (However, not all states permit this, such as Pennsylvania; state laws on real estate vary considerably.)
How would you proceed with this type of action? First, you'd need to look closely at the purchase contract to see what it says about buyer breach. If the contract provides a specific, exclusive remedy in the event of the buyer's breach, the seller is precluded from bringing a lawsuit for the full purchase price.
For example, in some states, the buyer's deposit is considered earnest money, meant to serve as liquidated (preset) damages in the event of a breach, in which case a court will not order specific performance.
All of the conditions of the contract applying to the seller must have been performed before a home seller can request specific performance. The seller must be ready, willing, and able to comply with the contract, by being prepared to convey to the buyer marketable title (with no defects) to the property that he or she contracted to sell.
Questions for Your Attorney
- Is a court likely to grant specific performance because the seller (or buyer) is refusing to go through with a real estate purchase agreement?
- What's the time limitation in our state for bringing a lawsuit for specific performance of a real estate sale?
- What does a seller of real estate get if successful in a lawsuit for specific performance against the buyer?
- Might it be more advantageous for me to seek money damages instead of specific performance?
- What might the legal fees be to pursue this type of case?