What remedies are available when a party defaults on a purchase contract?

Every buyer and every seller enters the transaction process intending to buy or sell. I have to believe there aren’t folks out there who get their kicks negotiating and signing purchase contracts knowing they will breach the contract and it will be great fun. To sell a home an individual must be sufficiently motivated to go through the pains of preparing the home, cleaning, and vacating for showings every time someone wants to see it and losing chunks of their weekends to open houses. Buyers need to bear all for the scrutiny of the mortgage lender, devote their evenings and weekends to searching homes online and in person, and paying a chunk of their hard-earned money as a deposit into trust. Both parties devote a sizable part of their lives in a short time frame to this process, so few enter it lightly, and fewer still look to breach the contract once they’ve come to that point, although it does happen. Let’s consider what the purchase contract states about the remedies available to the parties when a breach happens.

Non-performance

In every real estate purchase contract, there are both rights and responsibilities baked in for each of the parties to that contract. Additionally, the parties make covenants with each other to act reasonably and in good faith in the performing of their responsibilities to the other party all the while pointing to the ultimate culmination of everyone’s efforts, the completion of the contract. Any change in circumstances or motivation on behalf of the parties that causes them to fail to complete the contract, or change their mind and refuse to do so, is considered non-performance, and must have consequences equal to the residual pain caused to the opposite party. The confines of the consequences agreed upon are referred to in the purchase contract as remedies.

Can open, worms everywhere

When the situation arises where one party fails or refuses to complete the contract, the standard AREA purchase contract contains a term agreed to by both parties at the forming of the agreement which makes clear what remedies are available in general. This term states that “all remedies” are available to the harmed party. In the context of this agreement, the meaning of the word “all” means all legal recourse, and some examples are provided including claims for deposit money, damages, reasonable costs including legal fees, and disbursements. If your mental cash register is ringing, it should because these are only examples and not an exhaustive list, which would open the door for all damages suffered by the harmed party for relying on the breaching party through the contract formed in good faith.

Buyer Default 

The AREA standard purchase contract goes on to specify some specific items expected in a buyer default that would require the seller to be made whole. Depending on the point of the default, the lawyer may have already triggered the transfer of title which would need to be reversed to regain the title, enforce any liens against the property, or even regain possession of the property in the case of tenancy at will or other arrangements anticipated in the agreement. These are only examples of allowable cost claims but do not limit the seller’s ability to pursue other remedies either. Additionally, the deposit section of the agreement states that in the event of a buyer default the deposit is disbursed to the seller without prior notice, a portion of which deposit may be owed to the seller’s brokerage through the listing agreement, but the balance of which will almost certainly be used to retain legal counsel to file claims for remedies related to the buyer default.

Seller Default  

The seller is the holder of the property and bears several specific responsibilities because they agreed to transfer the property they hold now to another individual in exchange for money or other value. This means if the seller defaults the property remains theirs and it is the property that is the subject of the contract itself. For this reason, the seller and buyer make a joint statement in the purchase contract that they both acknowledge that the property is unique. This is crucial as a statement in the case of a seller’s default since the argument that the buyer can just go buy something else breaks down when both parties agree to the uniqueness of the subject of the contract. Because of this confirmation of the uniqueness of the property, the contract subsequently and explicitly states that the remedy of specific performance is made available to the buyer if the seller defaults. This means that the buyer, in addition to all other remedies available to them, can petition the court to force performance on this property specifically should they decide to pursue it.

Too many times, the buyer or seller in a transaction has a fuzzy understanding of the remedies available if one party or another default on the contract. Although no one ever hopes for default, it is good to understand the pre-agreed terms in the contract that detail the process of what options are available in such cases. As a mutual agreement, both buyer and seller rely on each other to see the contract to successful completion, so when one party changes course there are often real tangible harms perpetrated upon the other that need to be rectified. Legal advice in such situations is always advised, but REALTORS^® can help their clients understand the contract obligations, and their gravity before it ever comes to a breach.