Realtor® Attorney Joint Committee

REALTOR® ATTORNEY JOINT COMMITTEE Seller Default Provisions: No, You Can’t Just Not Close... Or Can You?

By: Lisa Gonzalez Moore, Attorney, LGM Law, PLLC

The first time it happened, I assumed it was an anomaly. My client, the seller in a residential transaction that I had been engaged to assist with negotiation, had changed her mind about moving out of state, and flatly refused to close. However, not much time had passed when another seller in a residential transaction for which my firm was acting as settlement agent, for personal reasons not disclosed to me, also decided that she did not want to proceed to closing pursuant to the terms of the executed contract.

While the market is arguably in a period of change resulting in a potential diminution of sellers’ negotiating leverage, lessons gleaned from a time period in which sellers were treating their performance of their obligations pursuant to an executed contract as optional should be gleaned as we navigate the continued changes in the residential real estate market. Brokers and Realtors® should set expectations for their seller customers at the onset of negotiations and caution their buyer customers about their choices in the face of a defaulting seller.

CONTRACT PROVISIONS FROM A SELLER PERSPECTIVE

The listing agreement is a binding contract between the broker and the seller once signed. Sellers should note that under the customary terms governing when the broker is due compensation, commonly the listing agreement will include terms that mandate that compensation is due upon the seller’s default of an executed sales contract. Dispute resolution terms often include mandatory arbitration to resolve conflicts among the broker, seller, and sales agent, and that the cost of such arbitration shall be split among the parties to the exclusion of attorney fees to the prevailing party.

The FR/BAR As-Is and Residential Contract form bases provide that upon seller default, the buyer may seek to recover damages resulting from the seller’s breach or specific performance. Specific performance is an equitable remedy that allows a court to order a breaching party to complete his or her side of the real estate contract. The mere filing of a suit for a specific performance (regardless of its ultimate success or the merits) can potentially tie up your property for several years, with or without the existence of a Lis Pendens. The reason is simple. It is virtually impossible to obtain title insurance necessary to convey title while an action for specific performance is pending. In effect, this can be a form of “legal blackmail.” Sellers who wish to cancel should understand that if the buyer pursued this course of action, they will not avoid addressing the buyer before marketing the property to other potential buyers.

CONTRACT PROVISIONS FROM A BUYER’S PERSPECTIVE

Many times, when a party to a transaction is frustrated by a perceived lack of good faith or breach of contract, it comes as a shock to such party that the settlement agent cannot immediately rectify the breach or wrong doing on their behalf. Litigating your rights under a contract that the other party has breached can be emotionally and monetarily draining as well as time-consuming without a firm guarantee that such party will be content with the ultimate outcome. Additionally, it is imperative that the buyer has performed under the terms of the contract; that is, the buyer must have tendered the consideration and executed their closing documents. When a buyer is also obtaining financing for the purchase, tendering can be a potential stumbling block to a successful specific performance suit.

CONCLUSION

If the residential real estate market continues to skew leverage to the side of the seller, we may see sellers increasingly gamble with breach for a myriad of reasons and goals. Sellers should be aware of the risks they face with the marketability of the property. Buyers should be aware that enforcing their rights under the terms of the contract will naturally include frustration at increased costs associated with litigating a specific performance suit, but unfortunately, sellers may continue to breach contracts without impunity if most buyers in a seller default situation choose to cut their losses and accept the return of their deposit in lieu of seeking legal representation to enforce the terms of the contract. •

This article is meant for educational purposes only. It is not intended to serve as legal advice and should not be used as a substitute for consultation with an attorney.