10/08/07: If Your Buyer Defaults, What Are Your Rights?
By Benny L. Kass
Q: We are under contract to sell our single family house, and settlement was to have occurred a week ago. Our buyers did not show up at the title attorney's office on the date spelled out in the sales contract, despite having been given notice of the time and place. Our real estate agent has not been able to get a explanation. What remedies do we have against the buyers?
A: Your sales contract should spell out what rights and remedies you have if your buyer is in default. But first, you have to make absolutely sure that there is a default.
You really have to find out why your buyer's did not show up at the closing. Is there a problem with your title, or with your survey? You - or preferably your attorney - should contact the title attorney to confirm that all was in order and that there were no clouds or other encumbrances on your title.
Were there any contingencies in the sales contract, such as obtaining appropriate financing, or getting a favorable home inspection report. While the buyer is at fault for not communicating with you or your agent, you should get all of the facts before you declare your buyer in default. You do not want to be surprised.
If all was in order on your side, then you have to look at your sales contract to determine the various remedies available to you.
Oversimplified, you have three options:
- keep the earnest money deposit. I hope that there was a large deposit when the Sales contract was entered into. All too often, these deposits are woefully inadequate, so that a buyer may just opt to walk away and let the seller retain that deposit. I have seen deposits as low as $500 for properties where the contract price was over half a million dollars. Your deposit should be large enough so that the buyer will not have any incentive to just forfeit that money and just walk away from the deal.
Keep in mind, however, that whoever is holding the deposit cannot just release the funds on your say-so. That person holds the money in escrow and cannot unilaterally release the funds unless both parties sign a written release or a Judge directs the escrow agent as to its disbursement.
Sue the buyer for specific performance: this is a legal remedy whereby the seller (or the buyer if appropriate) files a lawsuit in court asking the judge to direct that the buyer be required to go to closing and buy the house. This remedy is available only if you know that the buyer has the financial resources to do this. You obviously do not want to spend a lot of time and money in court only to learn that the buyer just does not have the money.
- suit for damages: let's assume that the sales price of your home was $450,000. Once you learned that the buyer was not going to settlement, your agent actively marketed the property but the best offer was only $410,000. Thus, your loss is $40,000, plus the additional carrying costs - mortgage payments, taxes and insurance - that you have to pay until the house finally sold.
You can sue your buyer for these monetary damages.
But do you want to get involved in litigation which is time-consuming, expensive and always uncertain.
Especially in today's market, where sales are slow, you may not want to lose your buyers, regardless of how distasteful this may be to you. You or your attorney should send the buyers a strong letter, demanding that they either go to settlement within the next ten days or provide you with a written explanation as to why they are in default. The letter should also contain a release document whereby the buyers agree to release the deposit to you.
Attorneys fees are usually one of the most serious impediments in the consideration as to whether to file a lawsuit. Our Courts follow what is known as the American Rule - namely that each side pays their own lawyer. There are several exceptions to this rule. If there is a statute - such as a consumer protection act - or if there is a specific provision in a legal document authorizing the prevailing party to be awarded legal fees, then judges may order the losing party to pay your legal fees in addition to any other remedies authorized by the Court.
Many real estate sales contracts specifically authorize attorney fees to be awarded to the prevailing party. But once again, you must make sure that this language is in your sales contract.
It should also be noted that many buyers will delete some of these remedies from the contract before they sign it. Many buyers are prepared to forfeit their deposit, but do not want to be sued in Court.
You also do not want your house to be tied up in litigation. In most cases, assuming that the earnest money deposit is large enough, forfeiture should be your remedy. Even if you have to file suit to get this deposit released by the escrow agent, it should not impact on your ability to find another buyer.
You may also want to consider going to binding arbitration. However, unless the contract specifically requires that any disputes between buyer and seller be resolved through the arbitration process, your buyer does not have to agree. Furthermore, I am personally not an advocate of arbitration over litigation. Studies have shown that in many situations, arbitration can be as expensive as going to court. More importantly, the rules of evidence do not always apply in an arbitration proceeding, which means that a lot of "hearsay" can be presented to the arbitrators, without giving the other side an opportunity to challenge or cross-examine.
Arbitration is binding on the parties. The Court are extremely reluctant to overturn an arbitration decision unless it can be shown that the arbitrators were biased or arbitrary. And since many arbitration awards do not provide the reasons - the justification - for the decision, there is no way to prove these things to a Judge.
Do not rely or friends or your real estate agent for legal advice. You need good solid recommendations from an attorney who has real estate experience in the jurisdiction where your property is located.