What is a Breach of Real Estate Contract?
The concept of breach of contract is closely tied to the sale and purchase of real estate. Breach of contract occurs when a party entitled to enforce a contract suffers detriment from a breach by the other party, or where the breach is materially adverse to that party’s interest in the contract (see Cal. Civ. Code 3300). Under California law, absent an express disclaimer, material damages for breach of contract include all damage proximately resulting from the breach, or which in the ordinary course of things would naturally be likely to cause. (Cal. Civ. Code 3300.)
In the context of a real estate deal, a breach may consist of the failure from a party to do something they had agreed to do under the contract. A seller of real estate, for instance, must deliver both possession and title of the property to the buyer. Whenever a seller acts contrary to that promise, a breach of contract has occurred. It may be that the seller refused to deliver the possession of the property to the buyer upon the buyer’s giving the agreed purchase price (see Cal. Civ. Code 1434). If so, the seller is obligated to perform under the terms agreed to. A seller might also breach by offering to sell property at a price below market value. If the seller then conveys the property to another buyer who is willing to pay a higher price than the initial buyer, the seller has breached its contract with the initial buyer. Breaching a contract in and of itself is not legal. It is the act of breaching the contract that is unlawful. (See Cal. Civ. Code 1430.)
Breach of contract happens when one party refuses to perform some or all of their duties under the contractual agreement. There are several different types of breaches that can occur in real estate transactions . A total breach occurs when one party refuses to complete the entire contract. A partial breach happens when the party does not perform a duty, but then continues to fulfill the rest of their contractual obligations. A secondary breach occurs when one party does not abide by the terms of the contract, and causes economic loss to the other party. A minor breach occurs when the party adheres to the terms of the contract, but does not exactly satisfy the terms.
A failure to close in escrow can often lead to a breach of contract claim. The Plaintiff in such a suit has the burden of proving damages. Under California law, where a buyer and seller have a contract, that contract usually is enforceable even if all of the terms have not been agreed to on both sides. For example, an offer from a buyer to purchase land and a written acceptance of an offer by the seller may create a binding contract. In such a case, the buyer is bound to purchase the land on the terms offered and accepted. The refusal to perform on either side makes the party refusing to perform liable for any damages caused by the breach.
The parties to a real estate transaction that falls into disarray may choose to resolve their disputes by litigating any contract claims rather than using alternative dispute resolution. Lawsuits involving breach of contract are quite common with real estate deals. Parties may seek a remedy to address the claims and issues in the lawsuit. The buyer or seller may choose to bring a lawsuit for money damages even if the subject of the deal is no longer available. Alternatively, the party may sue for damages and seek specific performance of the contract if the legal remedy will not adequately compensate them for the breach.
Common Causes of Breaches in Real Estate Contracts
One of the most common reasons for breach of contract disputes in real estate transactions is issues with financing. Imagine a buyer who was relying on the sale of their current home in order to put down a deposit on the new one, but the deal falls through at the last minute. Or a buyer approved for financing, but due to an unforeseen circumstance, such as loss of employment, their financing was denied just days before closing. These scenarios could result in a breach of contract by the buyer, and the seller may be left without recourse.
Unlike most other real property contracts, a purchase contract is unique because it contemplates both parties performing future acts, i.e., financing contingencies. Therefore, while a contract can be breached based on failure to perform past duties, it can also be breached with future duties. To satisfy a financing contingency, the buyer must be able to acquire financing based on its terms and conditions and within the contingency period. For financing contingencies to be enforceable, they must clearly identify the nature of financing desired, and how much the buyer is responsible for, i.e., a fixed amount, 80% of the contract price, no more than market rate, etc.
Misrepresentation can also result in a breach of contract. Using the previously mentioned example, if the buyer had represented to the seller prior to signing the contract that his employment was guaranteed but never had a real employment offer, then the buyer has breached his contract with the seller.
A buyer breaches a contract for failure to satisfy the time for performance. If the buyer fails to make a deposit when a contract demands or closes within the time required by a contract, the buyer is in breach. Depending on the type of sale-failures to close they will be different. Most residential sales require "time is of the essence". Therefore, if a closing statement has been sent to the buyer, the buyer must execute it, pay the balance thereof, and close by the date specified. On the other hand, a commercial contract, may allow time delays for certain events. While this does not excuse any failure to close, the seller may not immediately terminate the contract depending on what the delay is.
Failure to comply with contract terms can also result in a breach of a contract. A party may have a contractual right but if it fails to exercise that right adequately or in a timely manner, the other party may treat the contract as breached.
Legal Implications of Contractual Breach
The legal consequences of a breach of contract in real estate law can vary depending on the specific terms of the contract, the nature of the breach, and the extent of harm caused. For example, if a seller breaches a contract to sell a house, they may be required to return any down payment made by the buyer. Also, the seller could be liable for damages in an amount equal to the difference between the contract price and the fair market value of the property (if sold by buyer to another party). On the other hand, if there is a minor breach by the seller, such as a failure to repair a leaky faucet prior to sale, the buyer may be entitled to collect damages not to exceed the value of the contract $1,000.00.
In addition to the right of a buyer to recover damages or the earnest money deposit when a seller breaches a contract, a buyer may also have the right to specific performance to force a seller to complete the sale of the real property, provided that that the contract for sale is otherwise legal and the buyer has not done anything that would prevent the remedy of specific performance.
Another option is rescission of the contract, in which the troubled agreement is declared void and both parties are restored to the position they were in prior to entering the contract. A contract does not need to be followed all the way to closing before the buyer can rescind it. Rescission is an equitable remedy used to put the parties in the position they would be in had the contract never been executed. Discretion in granting rescission primarily rests with the court.
An injured party to a real estate contract may also have a legal claim for consequential damages, which are damages other than direct or expectation damages that were not contemplated by both parties at the time the contract was formed. Examples of consequential damages include expenses incurred in preparation to execute the contract, lost profit due to a third-party transaction, or loss of a sale to a third-party because of a breach.
How to Demonstrate Breach in a Real Estate Contract
Proving a breach of contract is often complicated. However, in the case of real estate, which is often a person’s largest asset, the stakes are high and sometimes it is worth the effort to prove a breach. For example, a broker may have committed a breach when he or she misrepresented the truth about a property to induce the other party to sign a contract for the sale of that property. Proving fraud is a high burden, but if it can be proven that the broker had made a material misrepresentation, then it can be built into a case for breach of contract. To prove a breach of contract, one needs to show the general elements of a breach of contract, including that:
- The agreement existed in writing;
- The plaintiff performed as required by the contract;
- The defendant failed to perform;
- The defendant’s failure to perform was not excused by the plaintiff or by the parties’ agreement; and
- The plaintiff was damaged.
As with any kind of fraud, proving it will usually rely upon some sort of testimony by outside persons who have first hand knowledge of the material events. For example, in the case of a material misrepresentation, a real estate attorney might provide evidence in the form of his or her testimony as to what was done and said by the broker. Similarly, expert testimony may be used to prove a breach. Most often, expert testimony will come in the form of a certified public accountant. An expert may provide testimony about specific calculations, such as the difference between the market value of the property and the amount it was sold for, or other damages which flow from the breach. Finally, and perhaps most precariously for the party denying a breach, is that direct testimony may be used. This means that the plaintiff can use direct testimony about witnesses who are not available for direct examination. For example, in the case of a misrepresentation, the plaintiff might want to show that the broker was warned by other people that the contract was at odds with the applicable laws and regulations. Direct testimony allows the plaintiff to argue that this warning was made, and that the broker knew or ought to have known that his or her statements to the plaintiff did not match with the facts that the broker had.
Remedies for Breach of a Real Estate Contract
When a breach of contract occurs, the innocent party may have a number of potential remedies, most of which are subject to various contractual limitations. Whether damages are sought or specific performance is requested, Chapter 93A litigation is similarly rare in the context of a real estate breach of contract case.
Monetary Damages
The party not in breach may wish to recover its damages, whether caused by direct breach, delay, or act or failure to act. A breach of contract plaintiff is entitled to be compensated for all losses naturally flowing from the breach of contract, i.e., all damages that are reasonably foreseeable in the normal course of things, or were within the contemplation of the parties when they made their contract. Although available, consequential damages may be limited or waived in the contract. Thus, a breach of contract plaintiff is entitled to recover only those consequential damages that were contemplated by the parties and are a natural consequence of the breach.
Specific Performance
To be entitled to specific performance, a contract must evidence a real intention to enter into a binding contract, contain all material elements of a sale , and evidence circumstances that make it unjust that the party seeking specific performance be denied performance or a remedy at law. Specific performance of contracts for the sale of real estate is an accepted remedy in Massachusetts. In fact, there is a presumption of irreparable injury that supports the grant of a request for specific performance of a real estate contract. If the property at issue is unique by reason of its location or value, a court may find that the loss suffered by the buyer if the contract is not enforced can not be compensated by money damages. However, the court will not grant specific performance if the sale is not based on a legally enforceable contract, as opposed to other binding obligations such as an option.
Other Remedies
In addition to the foregoing, equitable remedies may include rescission, reformation, a constructive trust or equitable lien, an accounting, and equitable subrogation. In the case of an enforceable option, when the option is exercised and the property is acquired, the seller and buyer should agree upon the payment of taxes. Where such an agreement is absent, equity will impose a just and reasonable apportionment of the obligation to pay the tax. Equity will issue its corrective decree where there is a concealment of a material fact.
How to Avoid Breach of a Real Estate Contract
Fortunately, there are some steps that all buyers and sellers can take to help prevent a breach of contract. While the breach of an agreement cannot always be avoided, it can make the situation easier for all parties involved if the breach does occur. The first step in preventing real estate contract breaches is to draft the sales agreement carefully. It is essential that the terms of the agreement leave no room for ambiguity. Every conceivable aspect of the property transfer should be addressed. Sometimes overzealous agents and buyers leave no stone unturned. However, the effort to examine every contingency can go overboard, showing that you do not trust the other party to uphold your end of the deal. Due diligence is always essential for real estate transactions. Buyers should conduct a thorough examination of the property and have an attorney review all documents before the purchase is made. Sellers should double-check the accuracy of their claims, especially when listing property, or making promises to buyers. Buyers and sellers should maintain an open line of communication with the other party. If issues arise or a breach looks likely, parties to the contract should immediately reach out and see if they can reach a solution before it is too late.
When Do You Need to Hire a Lawyer
Experienced real estate professionals have likely encountered a fair share of contract disputes among clients, but how you handle your client’s potential breach of contract is critical in determining their potential liability. You know what is going on, so you should be their first call when they believe they have been or are about to be breached.
There are also times when even the most experienced real estate professional doesn’t know how to advise their client on the consequences of breach or provide a client with a definition of a breach. Or when a lawyer will send you a letter accusing your client of a breach. It is at these times you need to call in an experienced real estate attorney, as a breach can have huge financial implications for parties.
A party may immediately contact an attorney in reaction to an alleged breach that causes no damage , while other parties will wait until significant damage has been done to file a suit. Even waiting to seek legal help can mean it is too late to respond. A breach that would have otherwise been protected under a contract, and no damages, the contract right may be lost. The party must ask itself if it wants to sue now to force compliance and maybe pay more in attorney fees than was gained by coming to an agreement, or hold off with damages mounting against the party.
Issues, such as default, rescission, damages, specific performance, and litigation, regarding real estate breaches of contract are nuanced and our knowledgeable real estate attorneys have the experience you can trust to advise you and your client correctly.