Lawsuits for Breach of Real Estate Sale Contract
On this page we will look at the various legal options and remedies available to both buyers and sellers when a breach of a real estate sale contract occurs. We will focus specifically on sale contracts for residential properties, which are somewhat different than situations involving commercial property sales.
The Residential Contract of Sale
If you enter into a contract to buy or sell a home in Maryland, the actual written contract agreement that you sign is usually the standardized Residential Contract of Sale. The Residential Contract of Sale is basically a form sale contract agreement that is developed and published by the Maryland Association of REALTORS® (MAR). This is a form contract that has been used for decades and is regularly revised and updated based on consultation with Maryland real estate attorneys and in response to new laws and regulations.
The Residential Contract of Sale is typically made available to all real estate agents who are members of MAR (which most are). The contract has a variety of customizable parts and addendums that can be used to add certain terms or conditions, or to comply with local regulations. For example, if the sale is being made conditional on a satisfactory home inspection, there is a standard Property Inspections Addendum. If the sale is contingent on the buyer qualifying for a mortgage, there is a Conventional Financing Addendum. Below is a list with links to the various form addendums to the MAR Residential Contract of Sale.
The key language, terms and conditions of the Residential Contract of Sale (and the various form addendums) have been in use for a very long time. As a result, the legal meaning and interpretation of the MAR Residential Contract of Sale is very well developed and established.
This means there is not much uncertainty about how the terms of the contract apply to certain factual situations. As long as you consult with an experienced Maryland real estate lawyer who is familiar with the MAR Residential Contract of Sale and case law interpreting it, they should be able to give you pretty clear guidance on how it applies to your situation.
Suing a Buyer for Breaching a Real Estate Contract
When a real estate sale contract gets cancelled, it is usually because the buyers back out of the contract. If a buyer backs out of a real estate sale contract, the seller might be able to sue them for breach of contract. The seller would be entitled to sue the breaching buyer to recover any damages they incur as a result of the breach. A seller’s damages would typically include the cost or “loss” resulting from having to sell the property to another buyer at a lower price, and any costs resulting from delays.
For example, let’s say that Jack enters into real estate sale contract in which he agrees to buy Jill’s house for $500,000. Jack gives a deposit of $20,000 and the contract states that closing will occur in 6 weeks. 3 weeks after signing the contract, however, Jack changes his mind and backs out of the sale.
What are Jill’s options? First, Jill has an obligation to mitigate her damages by promptly re-listing the house for sale on the market and trying to find a new buyer to replace Jack at the same price level ($500,000). If Jill ends up selling the house to a new buyer at a lower price than her contract with Jack, then Jill can sue Jack for breach of contract and Jill’s “damages” would be the difference in price between the contract with Jack and what she ended up selling the house for.
So if Jill ends up selling the house for $450,000 (instead of the $500,000 sale price Jack agreed to) then Jill would have a breach of contract claim against Jack and her damages would be $50,000. Jack would also be on the hook for any “additional expenses” that Jill reasonably incurred as a result of the delay caused by Jack backing out of the initial contract. For example, if Jill had to get a bridge loan, rent a storage locker, or continue renting an apartment for another month, those would be additional expenses Jack would be on the hook for.
When Can a Buyer Get Out of a Real Estate Sale Contract?
Many real estate sale contracts have a number of contingency clauses that give a wayward buyer the ability to legally bail out of the sale contract without technically being in breach. The 3 common types of contingency clauses that buyers can potentially use to bail out of the sale contract without breaching: (1) financing contingency; (2) home sale contingency; and (3) inspection contingency.
Buyer Financing Contingency
A buyer financing contingency is the most common type of contingency clause in a real estate sale contract. Unless the buyers are making a “cash” purchase offer, they will be getting a mortgage loan to finance the purchase of the property under the contract. The exact amount of how much the buyer is borrowing is set forth in the contract.
When the buyer is getting a mortgage loan to finance the purchase, the real estate sale contract will almost always have a buyer financing contingency clause. In Maryland, the buyer financing contingency takes the form of the MAR Conventional Financing Addendum. When a contract has a buyer financing contingency, it means that the buyer can terminate the contract if they are not able to get approved for the necessary mortgage loan.
Buyers frequently invoke this contingency when they are looking to bail out. In many cases, buyers will deliberately get rejected on a mortgage loan application in order to use this contingency to back out of the contract. This is technically a breach. When the contract is contingent on buyer financing, the buyers have a legal obligation to make an honest, diligent, and good faith effort to qualify for the mortgage loan. If the buyer lies on the loan application or otherwise deliberately gets rejected, the seller can potentially sue them for breach of contract.
Home Sale Contingency
The home sale contingency makes the sale contract contingent on the buyer’s sale of their own home. It basically says that the buyers will not be obligated to close on the sale contract unless and until they close on the sale of their existing house. Contingency clauses used to be common, but in competitive real estate markets they have almost disappeared because sellers will frequently reject any offers with home sale contingencies.
Just like with the financing contingency, the home sale contingency requires the buyer to act in good faith and make a diligent and reasonably effort to sell their home.
Inspection Contingency
The home inspection contingency give the buyer the right to have the home inspected and (usually) gives the buyer the ability to cancel the contract if the inspection reveals unsatisfactory conditions with the property. The exact terms of how a property inspection contingency works, what the buyer can ask for, and when the buyer can terminate the contract are too detailed to get into here. Just be aware that if your contract has a inspection contingency, this is something you will need to deal with because it gives buyers a lot of room to wiggle out of a contract.
What Happens if a Seller Breaches a Home Sale Contract?
In this section, we will discuss what the legal options are if the seller backs out or breaches a contract for the sale of a home. This doesn’t happen nearly as often as a buyer backing out, but it does happen. Usually when a seller tries to bail on a home sale contract, its because they think they can sell to another buyer at a higher price, or their circumstances have changed and they don’t want to sell at all.
When a seller breaches a sale contract or communicates their intent to back out of the contract (the legal term for this is “repudiation”) the buyer has the right to sue the seller for specific performance. A lawsuit for specific performance basically asks the court to issue an order forcing the seller to go through with the sale per the terms of the contract. This is a unique equitable remedy that is available to buyers in real estate contracts.
The idea behind the equitable remedy of specific performance is that real estate is highly unique. No two properties are exactly the same. Therefore, money damages are not always an appropriate remedy for breach of contract for the sale of real property. Namleb Corp. v. Garrett, 149 Md. App. 163 (2002)
Generally speaking, equitable remedies like specific performance are somewhat unusual. The courts usually don’t like granting this type of relief. They are much more comfortable issuing monetary judgments. However, real estate sales are the one area where specific performance is a commonly accepted remedy. Still, case where a party actually has to get a court order granting specific performance for the transfer of real estate are very rare.