QI thought I had sold my house last month. There was a signed contract with the buyer and the 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 buy my house. What rights do I have?
AThe contract that you entered into with your buyers should give you guidance. Most standard form contracts contain provisions relating to defaults -- by the buyer or by the seller.
When a real estate contract is entered into, it often contains certain contingencies, such as obtaining a satisfactory home inspection, getting a firm loan commitment or even selling the purchaser's home. Those contingencies should include time limits, whereby if the contingency is not removed within a certain time, the contract will either become void or will become binding. The specific contingency will usually spell out the consequences of not meeting the 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 buy your house, and the contract is contingent on the buyer obtaining financing. As long as the buyer promptly applies 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 -- the contract will usually become 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 that are contained in the sales contract are well drafted. You also want to keep a calendar so you don't miss deadlines.
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 saying that for all time limits contained in the contract, "time is of the essence." That 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. 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 choices:
* Keep the earnest money deposit. A potential buyer who signs a real estate contract generally gives the title attorney or the real estate agent 5 to 10 percent of the purchase price to hold in escrow. That is referred to as the earnest money deposit. It is a show of good faith on the part of the buyer that he is serious. In the event of a default, the seller has the right to keep the deposit and put the house back on the market.
The person holding the deposit is called the escrow agent. This agent does not have the unilateral right to release the deposit to either the buyer or the 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 settlement agreement or court order.
* Sue for specific performance. The seller generally has the right to sue the buyer, asking a judge to order the buyer to closing. That is known as an action for specific performance. Legal actions take time and are expensive. But if the buyer is financially able -- and, for example, if the property's value has declined -- it is a possibility for the seller to consider.
* Sue for damages. Let us assume that the sales contract called for a $500,000 purchase price. After the buyer defaulted, the seller was able to sell the property for only $400,000. The seller has the right to file a suit against the buyer for this $100,000 loss. Damages would also include any carrying costs that the seller had to absorb until the property was in fact sold to someone else.
Those are the basic remedies that a seller has in case of default by the buyer. Smart buyers will generally want to limit their exposure by spelling out in the sales contract that the seller retains only the option of keeping the deposit, and may not exercise the other two options.
Smart sellers, on the other hand, will want to keep all options open, and try to get as large an earnest money deposit as possible.
Should the seller default, the buyer should have the 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 unfair to the buyer to allow that. Accordingly, the law gives the buyer the right to sue for specific performance.
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 known as lis pendens. It puts the world on notice that there is a lawsuit involving the property. No intelligent third-party buyer would dare buy the property while such a lawsuit is pending.
Default, whether it be by buyer or seller, should not be taken lightly. Nor should it be claimed without giving the defaulting party an opportunity to cure the default. Regardless of the merits of a case, litigation is time-consuming and expensive.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.