Q.I thought I had sold my house last month. There was a signed contract with the buyer, and settlement was to take place toward the end of this month. The buyers removed all contingencies and arranged for a title attorney to handle the closing. However, I have just been advised that the buyers are being transferred out of the area and they cannot purchase my house. What rights do I have?
A:Hopefully, the contract which you entered into with your buyers will give you guidance. Most standard form contracts contain provisions relating to defaults – both by the buyer as well as the seller.
First, we have to define “default”. When a real estate contract is entered into, it often contains certain contingencies – such as obtaining a satisfactory home inspection, or getting a firm loan commitment, or even selling the purchaser’s home. These contingencies should include time limitations, whereby if the contingency is not removed within a certain time frame, the contract will either become null and void or will become a valid and binding contract. The specific contingency will usually spell out the consequences of not meeting the time deadlines.
Where there is a contingency in a sales contract, a buyer will not be in default should the contingency not pan out. For example, the buyer signs a contract to purchase your house, and the contract is contingent on the buyer obtaining financing. So long as the buyer promptly makes application for a mortgage loan, if the buyer is unable to obtain the necessary financing within the time spelled out in the contract – and advises the seller in writing of this fact – the contract will usually become null and void. Under these circumstances, the earnest money deposit will be returned to the buyer and there is no default.
Thus, whether you are a buyer or a seller, you want to make sure that any contingencies which are contained in the sales contract are well-drafted. You also want to keep a calendar so that any time limits are not missed.
Once all contingencies have been removed, both the seller and the buyer have the legal obligation to go to settlement. Usually, the sales contract will contain a specific date when settlement must take place. The seller may want to add language in the contract that all time limits contained in the contract are “time of the essence”. This generally means that if the deadline passes, there will be a default.
The legal dictionary defines “default” as “an omission or failure to perform a legal duty”. But no definition can do justice to the facts of each case. There can be no universal definition; each case must be determined on its own facts – and on the language of the sales contract.
If the buyer defaults, generally the seller has three alternative remedies:
However, the general practice is that the buyer will put up some agreed upon percentage of the sales price as this deposit.
In the event of a default, the seller has the right to keep this deposit, and put the house back on the market and resell it. However, the person holding this deposit is called the “escrow agent”. This agent does not have the unilateral right to release the deposit – to either buyer or seller – unless there is a written statement from both buyer and seller authorizing the release or – if the matter has to go to Court -- a court settlement agreement or a Court order.
Once again, litigation is time consuming -- and unpredictable.
These are the basic remedies which a seller has on the default by the buyer. Smart buyers will generally want to limit their exposure by spelling out in the sales contract that the seller can only keep the deposit, and not be able to assert any of the other two options.
Smart sellers, on the other hand, will want to keep all options open, and try to get as high an earnest money deposit as possible.
Should the seller default, the buyer should have the absolute right to sue for specific performance and damages. Generally, when sellers default, it is because they think they can get a higher price for the property. It would be manifestly unfair to the buyer to allow that to take place, and accordingly the law gives the buyer the right to file a suit for specific performance. And in most jurisdictions, such a suit (often accompanied by documents recorded against the property in the land records) puts a cloud on the seller’s title. This is known in the law as “lis pendens”. It puts the world on notice that there is a lawsuit involving the property. No third party buyer would dare to even consider buying the property while that lawsuit is pending in the courts.
Default – whether by buyer or seller – should not be taken lightly. Nor should it be asserted without giving the defaulting party an opportunity to cure the default. Regardless of the merits, litigation is both time consuming and expensive.