This article shall address the questions and concerns when there is a breach of a real estate contract by a buyer. Selling a home can be troubling enough, but it can be even more worrisome when there is a real estate breach of contract. Understanding and being familiar with real estate contract law can be frustrating.
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This article shall focus on the following points for a breach of contract case:
The purchase of a home is accomplished by the buyer making an offer to the seller and the seller accepting the offer. Legally, this is considered a real estate contract. The three legal requirements for all contracts are an offer, acceptance and consideration. Once those three elements are in place there is a legally binding contract that can be enforced under the law. If one party to the contract does not fulfill their obligations, it is considered a breach of the real estate contract.
What happens when there is a breach of real estate contract by a buyer? A buyer may breach a real estate contract in a variety of ways. The most common ways are as follows:
When you sign a contract to purchase property, it is typically accompanied by an earnest money deposit. The amount of the deposit varies according to each transaction but is generally 5% to 10% of the purchase price. Paying an earnest money deposit is a way for the buyer to show the seller that the buyer seriously intends to purchase the property in good faith, because if the deal doesn’t go through, the buyer may not get their money back.
The earnest money check is kept in an escrow account controlled by the seller’s attorney. If the buyer goes through with the sale, the earnest money is applied to the sale. For example, if buyer made a $3,000 earnest money deposit, this would later be subtracted from the amount buyer owes at closing.
What are the remedies for a buyer’s breach of contract? It is generally assumed that the seller keeps the deposit if the buyer fails to meet her end of the agreement. These terms must be written into the sales contract and agreed upon by both parties to be valid.
If the seller backs out of the contract per the terms of the purchase agreement and properly voids the contract, the buyer typically gets their earnest money back. However, where the buyer, as the breaching party, backs out and there is a buyer default on real estate contract, whomever gets the earnest money depends on whether the buyer has a valid reason for backing out of the deal. For example, a buyer would likely get their money back if they were denied for a mortgage and properly provided such denial notice to seller’s attorney within the mortgage contingency period. On the other hand, the seller would likely keep the deposit if the buyer simply changed their mind.
If both parties believe they are entitled to the earnest money deposit due to a contract breach, the matter can be taken to court and the seller can engage in litigation for breach of a real estate contract. The deposit cannot be taken out of seller’s attorney escrow account until a judge rules on it.
What should you, as the seller, when there is a breach of real estate contract by a buyer? In general, a seller has three different remedies which the contract would govern. These include:
In most situations, an aggrieved home seller can pursue only one legal action at a time. If one remedy fails, though, you may be able to file another lawsuit for a different reason. Remember, your sales contract may limit your options.
For example, the contract may state that if the buyer fails to close without good reason, you are entitled to “liquidated damages,” which is a set amount of money, and that you are not allowed to pursue any other legal remedies. In New York, most purchase contracts state that the damages due to the seller for a buyer’s breach of contract are limited to the amount of the contract deposit.
It’s important to note that as the seller, if you choose to file a lawsuit, the buyer may file a “lis pendens” in the public records. This notice shows that your property is involved in a lawsuit, and you won’t be able to sell your property during this time. Potential buyers are not likely to make offers, and most won’t even look at your property, knowing that it could be tied up in the courts for some time.
When the seller is ready, willing, and able to sell the property and where there is a buyer default on a real estate contract and the buyer refuses to close on the sale (for a reason not excused by a contingency), the seller has the right to terminate the contract and keep the earnest money payment. This is called a downpayment in New York, but is not to be confused with the 20% down payment that most buyers are required to make as part of the entire purchase amount.
This is usually legally valid even if the amount of the down payment is more than the amount of any damages to the seller caused by the breach. It is also valid if the seller has resold the property to another person for more money than the original contract price.
When the seller is terminating the contract, or if both buyer and seller are in default, the buyer only gets the earnest money payment back if the both parties agree upon it. Otherwise, the contract will govern how the deposit shall be returned, if at all, without having to pursue a lawsuit in court.
Generally, specific performance is granted only if monetary damages cannot adequately compensate the non-breaching party. If a buyer breaches the real estate contract, a seller will typically want to move forward with the purchase of real property, as agreed upon in the real estate purchase contract, by demanding specific performance.
The seller will have to show that they are ready, willing, and able to complete the purchase of real property, and can file a complaint in court demanding specific performance. This may be able to motivate the buyer to either fulfill their contractual obligations or attempt to negotiate a settlement. If not, the seller can proceed to trial seeking an order forcing the buyer to proceed with the purchase of the property – specific performance.
The above shall only apply if the contract of sale does not mention that the seller’s sole remedy in the form of liquidated damages, is limited to the amounts held in escrow as the contract deposit.
A seller that suffers financially whereby the buyer is terminating the contract can sue for the amount of its losses. For example, a seller sells its commercial building for $100,000. The buyer breaches its real estate contract by failing to close resulting in a buyer default on real estate contract. The seller can only fetch $80,000 from the next buyer. The seller can recover the $20,000 difference in sales prices as damages. Parties can also recoup losses for things such as title search costs, inspections and mortgage application fees.
Legal claims for breach of contract can be resolved through arbitration, mediation or small claims court. In binding arbitration, the arbitrator’s decision is final. If mediation is chosen, the mediator does not decide the case, but merely helps the two parties reach a decision. Filing a small claims court action generally involves sums below $5,000.
These methods cost less and take less time to achieve results than litigating the matter in court. A breach of a real estate contract usually provides for liquidated damages, which are a specific amount of money awarded if there is a breach. As mentioned above, liquidated damages can be limited to the amount of the earnest money deposit.
If a breach of contract lawsuit is filed, a complaint must be drafted stating how the breach occurred and the damages sought.
It is recommended you hire a real estate lawyer to help you resolve a real estate contract breach. A lawyer can be helpful by writing a letter or making a phone call on your behalf or representing you in a court action.
If money damages are sought, a seller may bring a lawsuit against the buyer and ask for money damages when a buyer has not done what was agreed to in the contract. The amount of the damages the court may award will be based on the difference between the contract price and the market value of the property at the time of the breach, less any down payment or other payment already made, plus interest from the date of default.
You should always have an experienced real estate attorney either draft entirely, or at the very least, review any real estate breach of contract letter sent to the buyer.
If you plan on writing a breach of contract letter yourself, you should consider the following:
In general, a seller has three different options when a buy breaches a real estate contract.
A breach of contract occurs when one party does not fulfill an aspect of the contract that was agreed to. In regards to a buyer’s breach, this generally occurs when the buyer is unable to secure the financing before the closing date, the buyer is unable to seller their home before closing, or if the buyer, in general, decides not to proceed with the sale.
Although a buyer can walk away from closing for any reason, in most cases, this means that seller is entitled to different legal remedies against the buyer. One remedy is that a buyer’s earnest money deposit can be kept by the buyer. Another remedy is that liquidated damages can be claimed in the event of default currently. Without liquidated damages, a third remedy would be for the seller to sue for actual damages, which could exceed the deposit.
Is suing a buyer for breach of contract worth it? Absolutely, especially if the seller has sustained a great degree of financial loss. How much are the real estate breach of contract damages? The amount of the monetary damages the court may award will be based on the difference between the contract price and the market value of the property at the time of the breach, less any down payment or other payment already made, plus interest from the date of default.
If the real estate contract does not limit a seller’s remedy to just the seller being able to keep buyer’s earnest money deposit, then the seller may also pursue for breach of contract and claim liquidated damages and specific performance.
If the contract does not limit a seller’s remedy to just the amount held in escrow as the earnest money deposit, the seller can pursue the buyer for more damages. An examples of this is if the value of the property decreases by more than the amount of the earnest money, than the seller may claims the difference in liquidated damages or may try to pursue specific performance of the contract.
A seller that suffers financially because a breach of real estate contract can sue for the amount of its losses in seeking monetary damages. Parties can also recoup losses for things such as title search costs, inspections and mortgage application fees.
If the buyer backs out, whoever gets the earnest money depends on whether the buyer has a valid reason for backing out of the deal. For example, a buyer would likely get their money back if they discovered a serious flaw in the property during a final walk-thru of the property which did not exist during the initial inspection prior to entering into contract, e.g. finding termites and damage from them when no such termites or damages existed during the initial inspection. On the other hand, the seller would likely keep the deposit if the buyer simply changed their mind.
As a seller in which there is a breach of real estate contract by a buyer, a real estate attorney or law firm is crucial in evaluating your options and the best course of action against the seller.
At Law Office of Yuriy Moshes, we are experienced in such real estate matters and real estate contract law. We represent sellers and buyers in the greater New York City area including all its boroughs, including Manhattan, Brooklyn, Queens, the Bronx, and Staten Island) as well as Northern New Jersey, Long Island, and Upstate New York. We can also provide a consultation if you are the breaching buyer. If a buyer breached their real estate contract and you wish to discuss your case, we will provide a free consultation.