QI have signed a contract to sell my house, but it appears that the buyer is having a case of buyer's remorse. I think she wants to back out from the contract. My real estate broker has asked me to determine if the buyer is in default on the terms of the contract. How do I do this? What constitutes default?
AI am surprised that your real estate broker was unable to provide you with a basic understanding of the concept of default.
The dictionary defines "default" as "an omission or failure to perform a legal duty."
You and your buyer signed a purchase and sales contract. The first question is whether this is a valid, legally binding document. To have a valid contract, four things are required:
* Offer. In the Washington area, it is customary for a potential buyer to make an offer to the seller. The seller can either accept, reject or counter that offer. If the seller opts for either of the latter approaches, the original offer presented by the buyer is no longer in effect.
* Acceptance. Sometimes buyers and sellers go back and forth, making offers and counteroffers. If an offer or counteroffer eventually is acceptable to both sides, and they sign on it, there is a contract. This means that both parties have reached agreement on all of the terms and conditions included in a real estate sales contract.
* Consideration. Generally, when a buyer makes an offer that is ultimately accepted, he will give his lawyer or his real estate broker a check for a portion of the purchase price, usually 5 or 10 percent. This is known as the earnest money deposit. To have a valid, binding contract, there must be some consideration -- and it usually requires money. However, consideration need not always be financial; if the purchaser has refrained from buying some other property (or if the seller has taken the house off the market because of the contract) this can also be considered "consideration." To be on the safe side, it is best to have some money attached to the sales contract.
* Written document. To have a legal contract for the purchase and sale of real estate, there must be a written document, signed by both buyer and seller. Oral promises will generally not be upheld in court. In modern times, faxes and e-mails have become standard practice, but even if you have reached agreement by e-mail, make sure you still have a paper trail, signed by all parties to the transaction.
Once you have determined that there is a valid contract, the next step is to see if there are any contingencies that would give your buyer the right to cancel the contract without being in default. There are many types of contingencies -- including home inspection, financing, review of condominium or homeowners association documents, or even sale of the buyer's home. Read the contingencies carefully. If you have questions as to their applicability, talk with your lawyer as to the effect of any such contingency.
Let us now assume that there is a valid, legal contract and that your buyer has removed all contingencies. Your buyer has obtained a satisfactory home inspection and a firm commitment for a mortgage loan. But at the last minute, your buyer wants out of the deal. Unfortunately, this is not uncommon nowadays.
You must look at your real estate contract. It should spell out your rights when your buyer has failed to perform a legal duty -- in other words, is in default on the terms of the contract.
Generally speaking, when a buyer is in default, a seller has three alternative remedies:
* Keep the earnest money deposit. A buyer wants to put down as little as possible as an earnest money deposit, but a seller wants as much as possible. If the buyer is in default and the seller thinks the house can sell quickly to a third party, he may opt to keep the deposit and put the house back on the market. However, it should be noted that in most cases, if there are real estate brokers involved in the transaction, they generally will be entitled to half the deposit as their commission. The real estate contract should contain all these terms and conditions, so there is no mistake -- and no legal fights -- should the buyer be in default.
Sometimes, the buyer might not be willing to release the deposit. This deposit is held in escrow, usually by the title attorney or the real estate broker. The escrow agent must not -- and cannot -- release the funds to anyone unless there is a release document, signed by buyer and seller, spelling out the terms of the distribution.
The buyer may dispute that she is in default. In this case, the seller may have to take the buyer to court. We follow what is known as the American Rule regarding legal fees. That means that unless there is language in a statute or a contract that will give the prevailing party in litigation attorneys' fees, each side will have to pay its own lawyer.
Thus, it is important that every real estate contract contain language such as this: "In the event litigation is required involving the terms and conditions of this contract, the prevailing party shall be entitled to reasonable attorneys' fees and costs as determined by the court."
* Sue for specific performance. A seller has the right to sue the buyer, asking that the court require that the buyer comply with the terms of the sales contract. Obviously, if the buyer has no money, such a remedy would be useless. But many buyers are financially able to go to closing on the house under contract, and our legal system has created a mechanism whereby those buyers can be forced to honor the terms of the contract they signed.
A 1980 D.C. Court of Appeals case involved singer Roberta Flack. In that case, the court stated: "Specific performance of a contract is ordered when the legal remedy, usually money damages, is deemed to be either inadequate or impracticable. When land is the subject matter of the agreement, the legal remedy is assumed to be inadequate, since each parcel of land is unique; thus, equitable jurisdiction in this case is firmly established."
Obviously, litigation is timely, expensive -- and uncertain. But if the earnest money is small -- or if the property has gone down in value below the contract price -- a specific performance suit is an option to consider.
* Sue for damages. A seller may also sue the reluctant buyer for damages.
Let us assume that the contract sales price was $300,000. After the buyer defaulted, the seller was able to sell the property for only $250,000. And in addition, the seller had to carry the house for a long time, thus paying additional real estate taxes, insurance and home mortgage payments.
The seller has the right to sue the buyer for these damages. However, courts are often stingy when it comes to determining damages, and this should be a remedy of last resort.
If your buyer is in default, or at least you think she is, you should carefully consider all your options. It is easy to say "let's sue," but that's not always the answer. Talk to the buyer first, and see if there is a compromise. Perhaps the buyer can be persuaded to go to closing if you reduce the price by a couple thousand dollars. Clearly, that is faster, and much less expensive, than litigation.
Note that many buyers, when they sign a real estate contract, limit their exposure to the loss of their earnest money deposit. They specifically prohibit the seller from suing either for damages or specific performance.
A real estate contract is an important legal document. The form contract that your real estate agent gives you is only a form -- it is not carved in stone. Every sales contract should be read carefully by both buyer and seller, line by line, and paragraph by paragraph. If you do not like or understand a particular provision in that form, question it.
Whether you are a buyer or a seller, you do not have to sign the form in "as is" condition. You have every right to make all the changes you desire. It's up to the other party to decide whether to accept.
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.