Imagine that you are looking to buy a new suburban home for your family. You drive around countless neighborhoods, tour open houses, meet with agents and brokers, and finally find a house within your price range that fits your needs. You make an offer. The seller accepts. You hire title agents, insurance folks, inspectors, and real estate lawyers. You both sign the sales contract, with the closing to occur within several weeks. And then, you receive word from the seller: He’s changed his mind.
Or, imagine being on the other side of the table: You have repaired and fixed up your home, found a listing agent, held open houses, received one or more bids, and accepted an offer. You're getting ready to move, and looking forward to getting your money out of the house. Then the buyer pulls out before the closing date.
These can be nightmare scenarios for home buyers as well as sellers. If the other party tries to wiggle out of your real estate purchase and sale agreement, can you make him or her follow through to the closure of the deal?
Legal Background on Real Estate Contracts
A real estate purchase agreement (sometimes called a contract of sale) is a binding contract if it has been signed by both the seller and the buyer, and if the buyer has given the seller a deposit (known in legal parlance as consideration).
The parties are obligated to meet the terms and conditions of the contract and to take the actions that they agreed to take in the contract. In some situations, these actions will lead to the contract being canceled for reasons that do not constitute a breach; for example, if the buyer conducts a home inspection and is dissatisfied with the outcome, and the contract included a "contingency" specifically conditioning the sale on the buyer being satisfied with the results of the inspection.
However, if either party fails to perform under the contract for a reason not allowed within the contract, the other party can obtain certain kinds of relief, called remedies.
The most common legal remedy is money damages. Money damages is fairly simple to understand, as it compensates the injured party for any financial consequences of the sale falling through. The buyer, for instance, could sue the seller for all of the costs put into the transaction, including a return of the deposit (with interest), as well as damages for any missed time and opportunities.
However, another possible remedy in the context of property sales is a so-called "equitable" remedy called "specific performance." Specific performance isn't based on any absolute legal right. Rather, it involves a court using its discretion to order the nonperforming buyer or seller to perform and complete the contract as if it had never been breached—that is, to sell or buy the house.
This remedy is less favored by many states' courts. It has been referred to as an "extraordinary" remedy (in Georgia, for example). After all, in the most extreme case, it could lead to someone being forced to sell a home that he or she wanted to stay in.
On the other hand, courts do acknowledge that where one person's object was to buy or sell a property, and real estate is unique, mere money damages will often not be sufficient to rectify the breach.
The court will also likely want to ensure that the contract is just and reasonable before enforcing it (as is the law in California), not to mention legally valid (containing a specific description of the property, both parties' signatures, and so forth).
If you choose to seek specific performance as a remedy, you will likely not be also able to seek money damages. The law of your state may require you to choose between these remedies (as it does in Texas, for example).
Home Buyer’s Remedy of Specific Performance
If the seller is able to perform the various agreements made in the contract, but is simply unwilling to do so, the buyer may bring a lawsuit for specific performance. The courts might grant this in recognition of the fact that each parcel of land is unique and that a monetary award would be inadequate, in which case the court will order the seller to convey the property to the buyer according to the terms of the contract.
A buyer may also obtain specific performance from the seller when the seller can’t convey all of the property covered by the contract, such as when the parcel owned is smaller in area than that agreed to be sold, or when additional defects in title are uncovered. The seller may be compelled to perform to the extent possible, with an abatement (reduction) of the purchase price to compensate for the defect or deficiency. The amount of the abatement is usually equivalent to the value of the property not conveyed.
Once the lawsuit is underway, the real estate buyer may file a notice of pendency to prevent any transfer of the property to a third person until resolution of the claim. The notice is sometimes called a notice of lis pendens, and it is usually filed in the recorder of deed’s office. The effect of filing this notice is that the seller won’t be able sell the property to another buyer while the lawsuit is ongoing.
To obtain specific performance, the buyer must show that he or she was ready and able to perform at the closing. Most importantly, this means that the buyer must show that he or she had appropriate financing from a lending institution.
Home Seller’s Remedy of Specific Performance
Sellers aren’t the only parties who might get cold feet. Sometimes, a buyer might not want to go through with a sale. A seller of real property may, in some states, then file a lawsuit against a defaulting buyer for specific performance of the sales contract.
The theory in the states that allow this (such as Missouri) is that a symmetry should be upheld between the remedies available to a buyer and a seller. Other states, however (such as Pennsylvania) limit the relief that a home seller can obtain to money, on the grounds that this is adequate. (As a practical matter, the court probably feels uncomfortable ordering a buyer to take ownership of a home that he or she no longer wants.)
You'll need to take a close look at the purchase agreement to see what it says about the buyer's breach, as well. If the contract provides a specific, exclusive remedy in the event of the buyer's breach, the seller is precluded from bringing a lawsuit for the full purchase price. For example, in some states, the buyer's deposit is considered earnest money, meant to serve as liquidated (pre-set) damages in the event of a breach, in which case a court can't order specific performance.
All of the conditions of the contract applying to the seller must have been performed before a home seller can request specific performance. The seller must be ready, willing, and able to comply with the contract, by being prepared to convey to the buyer marketable title (with no defects) to the property that he or she contracted to sell.
Questions for Your Attorney
- Is a court in our state likely to grant specific performance because the seller (or buyer) is refusing to go through with a real estate purchase agreement? How difficult is the process?
- What's the time limit in our state for bringing a suit for specific performance of a real estate sale?
- What does a seller of real estate in our state get if successful in a lawsuit for specific performance against the buyer?
- Might it be more advantageous for me to seek money damages, instead of specific performance?
- What might the legal fees look like to pursue this case?