Picture this: You've found your dream home, negotiated a good price and signed the purchase agreement. You've even spent money on home inspections and mortgage application fees. Only now, the seller has cold feet and wants to back out of the deal. Can you force the seller to close? The answer to that question depends on whether you can apply for a little known legal remedy called specific performance.
Specific performance is a legal remedy whereby the judge orders a party to fulfill his contractual duty such as completing a home sale. It's usually ordered when monetary damages are not enough.
How Might a Real Estate Closing Fall Apart?
It's not just the seller who might get cold feet in a property transaction. In fact, there are many possible situations in which a real estate deal might fall apart. The buyer, for instance, might find a home and sign a purchase contract, but sometime during escrow he finds another property that's even better with a lower price.
Or perhaps the home inspector finds dry rot in the timber that requires immediate repair, or the buyer learns that a new train line is going to be built right behind the house. Does he still have to buy the home under these circumstances?
Or what if the seller is moving to a job in another state when before the closing, the job falls through. What happens next? Can the buyer force the seller to close the home sale? Like most things in real estate, the answer to that question is – it depends.
A Primer on Real Estate Contracts
Before we look at specific performance cases, it's worth reviewing how real estate contracts – also known as "purchase contracts" or "sale agreements" – work. This document becomes legally binding when the seller accepts the buyer's offer and they agree on all the other conditions.
Once the contract is live, both the seller and the buyer (but mostly the buyer) start taking the actions to which they agreed in the contract. For example, the buyer might arrange financing, arrange an inspection from a qualified home inspector and have the property appraised to make sure it is worth the offer price.
Usually, the contract will contain a set of contingencies, giving the buyer or the seller a way out of the contract if certain conditions are not met. The most common contingencies relate to financing and home inspection. So, for instance, if the buyer cannot get a mortgage despite his best efforts, or the home inspector find dampness and mold in the basement, then the buyer can usually cancel the contract and walk away from the deal without penalty.
Consequences for Breaching a Real Estate Contract
Breach of contract happens when someone tries to back out of the contract without a permitted reason. For instance, if the contract says that the parties will close the deal 10 days after the contingencies are satisfied, but the seller refuses to sign the deed because he does not want to move anymore, then the buyer may be able to sue the seller for breach of contract.
Assuming a party has indeed violated the terms of the contract, the court will award the innocent party one of two legal remedies: money damages or specific performance. In most states, these remedies are mutually exclusive, meaning you must choose one or the other. You can't have both.
What Are Money Damages?
Usually, the court will award damages to the injured party in the form of hard cash to compensate him for the losses associated with the sale falling through. For example, if the seller changes his mind about moving just before the closing date, the buyer might claim money damages from the seller for a return of the down payment as well as earnest money deposits with interest for:
- Home inspector fees.
- Agent and attorney fees.
- Mortgage application fees.
- Other out-of-pocket expenses.
The buyer could also claim opportunity costs, which are the losses associated with choosing this home over any other. For example, in a hot property market, the prices of comparable homes may have shot up by $10,000 since the buyer made an offer on this particular home. The buyer should also be able to claim that extra $10,000 as part of his damages award. If the shoe was on the other foot, and the buyer defaulted, the seller could claim any reduction in the home's sale price since the original offer price was agreed.
What Is Specific Performance in Real Estate?
The other possible, though far less common, remedy is specific performance. With specific performance, the court will order the reluctant seller to live up to the contract – in other words, to sell the house.
If you think about it, this is an extraordinary remedy. The court is forcing someone to do something he really does not want to do and that could potentially put him in a situation of hardship. If the seller changed his mind because a job offer fell through, for example, then forcing him to sell the home could leave him homeless.
On the other hand, the courts do recognize that a real estate deal is so much bigger than "mere" money. People fall in love with specific homes in specific locations, and no two properties are exactly alike. Sometimes, it's not enough to award money damages and only an award for specific performance will satisfy the innocent party.
Can Anyone Get Specific Performance?
Several things have to happen before you can get an award for specific performance.
The contract must permit you to seek an award of specific performance. In some states, the right to seek specific performance is written into the standard sale conditions. However, it's possible for the parties to negotiate these conditions out. If the contract expressly prevents you from seeking specific performance in lieu of damages, then you will not be able to ask the court for this remedy.
The innocent party must be ready, willing and able to close the sale. You cannot ask for specific performance if you yourself are not in a position to close the sale. The burden is on you, as the plaintiff, to show that you have done everything you were supposed to do under the contract. If you are the purchaser in this scenario, for instance, you must be able to tender the full purchase price or have a fully approved mortgage with the funds ready to go.
The judge must award specific performance. When setting the remedy for breach of contract, the court strives to put the innocent party in the same position he was in before the breach – that's why money damages are the most common remedy. To get specific performance, you have to persuade the judge that money damages are not an adequate remedy. For instance, the home must be utterly unique and contain features the buyer could not get anywhere else. A cookie-cutter home in a cookie-cutter neighborhood won't do because you can take your money damages and buy an almost identical home in the neighborhood.
Is It Worth Filing a Specific Performance Lawsuit?
Short answer: possibly not because in most cases, it's futile. Suppose the deal fell through because the buyer lost his job and had his loan approval pulled. Even if a judge ordered specific performance, compliance would be impossible – the buyer cannot pay the purchase price. Common sense would suggest that the seller cut his losses, keep the earnest deposit and walk away from the deal.
A buyer may have more success in forcing specific performance against the seller, but even an open-and-shut case can involve lengthy court proceedings with no guarantee of success. The buyer is going to need a place to live as soon as possible and may be missing out on other opportunities while the lawyers argue specific performance in court. The best advice is to engage a lawyer, as soon as the deal collapses, to figure out your options.