Real Estate Law

Home Purchase Contract Breach

Contract Breach Overview

A contract is an agreement that defines the rights and obligations between the parties.  When a party does not meet the obligations of an agreement, it is called a "breach of contract".  A contract is a binding promise between two or more parties that is enforceable by the law. A contract is considered legally enforceable when it satisfies the requirements of applicable law which often includes an "offer", "acceptance" and "mutual consideration".

A real estate contract is a specific type of contract which contains the terms and provisions for the transfer of real estate. All real estate agreements in the United States must be in writing to be considered valid under the “Statute of Frauds”. The parties to the written contract, typically through their real estate agents come to a basic understanding of the material terms of the agreement beforehand. The attorneys for the buyer and seller then memorialize the understanding in the form of a written contract, typically referred to as the “Purchase-Sales Agreement”. The contract should include the final accepted price that is agreed to by both the buyer and seller. Most real estate contracts also require a “down-payment” which acts as a ‘binder’ and prohibits the seller from entering contract with any other party. A breach of the contract occurs when a party does not perform under the terms of the agreement.

If one of the parties does not perform under the contract, the other party to the contract may file a lawsuit in the court of proper jurisdiction to enforce the terms of the contract.  If a lawsuit is filed, the court will determine the validity of the contract and determine whether the breach occurred, whether it is a material breach, and if so, then what type of damages the breaching party should be liable for.

Real Estate Contract Elements

• Those buying and selling are called the parties.          

• The subject property is the real estate being bought or sold. It is described in a formal legal description.

• The price agreed to by the purchaser and seller.

• The effective closing date of the real estate agreement is when the transfer of lawful ownership of the property occurs.

• The date of possession is when the buyer achieves the legal right to possess the property.

• Any items which are included and/or excluded in the sale, such as appliances and/or fixtures.

 

Contingency Clauses

Most real estate contracts also contain ‘contingency clauses’. In real estate, a contingency clause defines a specific condition that must be met for the contract to be considered binding.  The most common real estate contingencies include a mortgage contingency clause; inspection contingency clause; appraisal contingency clause; and a title contingency clause.

• The mortgage contingency – the receipt by the borrowers of a ‘Mortgage Commitment’ is deemed a condition of the agreement.

• The inspection contingency - the right to inspect the property’s building structure and components, like the roof, the heating and cooling system, or perhaps to verify the property boundaries.

• The appraisal contingency – The appraisal contingency typically makes the valuation of the property a condition of the agreement.

• The title contingencies – The title contingency makes proper conveyance via a clean title with ‘no clouds on title’ a condition of the agreement.

• Other contingencies – All private parties can agree to any lawful terms that memorialize an understanding that the transaction can proceed. It is not uncommon for real estate developers to include contingencies related to permit and zoning approval process so that the property can be further developed.

 

These contingencies are designed to provide appropriate notice to the other party, that permits one of the parties to walk away from the legal agreement. This is also referred to as “recission” or “to rescind” the contract.

There are other standard real estate contract provisions, the most common being what happens if the contract is not closed or completed, due to a breach of the contract by one of the parties.  This section is usually called the “default” or “default and remedies” section.

What Is a Breach of Contract?

To breach a contract means to fail, without legal excuse, to complete any promise or contract provision that a party has promised, in the contract, to perform.  The contract provision that is “breached” by the failure to perform or honor the terms by one or both of the parties must be one that is agreed to by both parties, and what is known as a “mutual agreement”, as in clearly agreed to, in advance, by all the parties.

 Examples of Breach of Contract:

• Party’s failure to close the contract, without just cause.

• The seller’s failure to deliver possession of the property, per the contract.

• The seller’s failure to deliver a deed with clear title.

• The seller failing to disclose the actual condition of the property, or the buyer failing to disclose the inability to get financing.

• The buyer’s failure to make regular and timely payments on a private mortgage note.

 

Damages/Injury Caused by a Breach of Contract

All real estate is inherently unique, so the breach of a contract may deny the buyer the right to acquire that unique home or parcel of ground.

The non-breaching party often suffers direct financial loss due to the breach of a real estate contract.  This can occur in several ways, including the payment of costs and expenses necessary to perform under the agreement.

There can also be financial loss to either party that is related to the breach, or default by the other party, such as expenses occurred that were the result of the expected closing and transfer of the property which did not occur.  These might include moving expenses or other expenses made in anticipation of the sale.

There can be extreme emotional reactions to the failure to complete a valid real estate contract, such as the much-expected move to a new home falling through.  Unfortunately, contract law does not usually allow for compensation for this kind of injury, but rather only provides for actual monetary loss or the other remedies described below.

Possible Solutions and Remedies to the Breach

There are several ways a real estate contract can be written and structured to help avoid a breach of contract.  When a contract breach occurs, there are several possible court solutions, or remedies, that can be ordered to provide relief or compensation to the non-breaching party.

A “remedy” in contract law is the process to achieve justice where legal rights are infringed.

For real estate contracts, a remedy might include:

1. Rescission.  This means to terminate the contract and place the parties in the position they were in the date the contract was created.  A rescission example would be where the seller did not lawfully have clear title, for whatever reason, and the buyer would then be allowed to walk away and keep his earnest money deposit.

2. Specific Performance. This is where a court orders the closing of the contract and compliance with all the terms and conditions of the original agreement.

3. Monetary Damages. Where one party is awarded, or compensated, for the expenses and costs they have incurred due to the breach by the other party.

4. Liquidated Damages. This is a contract clause that specifically states that should one party to the agreement breach the contract, the other non-breaching party receives an agreed-upon amount to satisfy his or her remedy to the breach of the contract.

 

How to Work Around and Avoid or Solve a Breach

There are several ways to prevent a breach of a contract.  It is imperative that contract parties always maintain a close line of communication, always keeping the other party informed of their status.  Should trouble or a circumstance arise, such as a title issue, or a negative inspection report, it is important to provide “timely notice” of any delays.

If there is a breach, or if there is an ‘anticipatory breach’, which occurs when one of the parties announces in advance that they cannot complete the transaction, then several solutions typically present themselves.  Perhaps a contractual modification would be in order, to allow for the seller to cure his title issues, or to allow a buyer more time with his mortgage company to obtain his loan, and so forth.

Finally, a liquidated damages clause is often a good idea.  A liquidated damages clause is a provision that predetermines the remedy for a breach of contract, to avoid the time and expenses required to take the matter to court.

If the buyer contracts to buy a property, the seller might ask for a % of the sales price in earnest money, which is put in escrow to ensure the buyer is motivated to close and also to gauge the buyer’s sincerity to truly be interested in the property.  A liquidated damages provision might say that the buyer forfeits his earnest money if he breaches the contract, giving the seller some satisfaction for the trouble he had to endure due to the buyer’s breach.  These clauses are very common and usually represent a good way to mitigate against harm if there is a breach of contract problem.