UNDERSTANDING THE CONTRACT’S “FAILURE TO SETTLE” CLAUSE
Once all the contingencies in a contract for the purchase and sale of residential property have been satisfied, the parties are obligated to proceed toward closing. But what if, after all that, the buyer refuses to go through with the purchase? Sellers often assume that they get to keep the buyer’s deposit, but this is not necessarily the case. What if it is the seller who refuses to go through with the sale? The answers to these questions should be found in the contract, in a section usually headed FAILURE OF BUYER OR SELLER TO SETTLE.
IF THE BUYER FAILS TO CLOSE WHEN OBLIGATED TO DO SO, the contract may or may not provide for LIQUIDATED DAMAGES. Buyer’s failure to close is a breach of contract entitling the seller to damages. Damages means that the buyer pays the seller to compensate the seller for his losses because of the buyer’s breach of contract. Depending on the circumstances, the seller’s costs may include the cost of relisting the property, any real estate commission which the seller has to pay according to the listing agreement between the seller and his realtor, non-refundable relocation expenses, and the taxes and insurance premiums the seller has to continue to pay. If the seller ends up selling the property to another buyer for less, his damages will include the difference between the two prices. Damages do not include amounts to assuage the seller’s angry feelings or punish the buyer.
The usual rule in contract law is that a person damaged by a breach of contract can sue for his losses. Part of the process is proving in court exactly what his losses are, and how much is necessary to “make him whole.” Once he has a judgment for a particular amount, he must then collect the amount from the breaching party. Residential real estate contracts can provide that this usual rule applies to a breaching buyer.
But, the parties can choose a different procedure. One choice is the use of a LIQUIDATED DAMAGES CLAUSE. This says that the parties are able to estimate the damages that would be caused by the buyer’s breach of contract, that the estimate is equal to all or a portion of the buyer’s deposit, and that if the buyer breaches the contract, that amount of the deposit will be paid to the seller. The clause should also say that the amount is liquidated damages and not a penalty; the purpose is to “make the seller whole,” not to punish or deter the buyer. The amount must be reasonably related to the amount of damage the seller is likely to incur.
Sometimes the FAILURE TO SETTLE CLAUSE will say that the seller cannot recover any more damages than the deposit amount – he takes the deposit (or a portion of it) and both parties walk away. Most of the time, this is the most desirable option for the seller. He does not have to go to court, or prove his damages. He can take his money, forget about the old buyer, and concentrate on finding a new buyer. (If, however, the seller has accepted a very low deposit, he might not think this option is so great.)
Other times the LIQUIDATED DAMAGES CLAUSE will say that the seller can sue the buyer for his damages and that the deposit will be used to pay the damages awarded by the court, if any. The advantage to the seller is that if he gets an award, the deposit is available to pay it, at least to the extent of the deposit. This relieves the seller of the burden of collecting on his judgment, at least to the extent of the deposit. The drawback is that he still has to go to court.
IF THE SELLER FAILS TO CLOSE WHEN OBLIGATED TO DO SO, it is the buyer who’s damaged. The seller may have been planning to move to take a job elsewhere, and the job evaporated, or seller may have fallen ill and wants to stay put, or seller is moving into new construction which is not ready, or many other scenarios. Meanwhile, the buyer has incurred substantial costs for inspection, borrowing, title work, relocation expenses, etc. and may have resigned a job or sold his previous house in anticipation of the move, to say nothing of perhaps having no place to go. The FAILURE TO SETTLE CLAUSE usually provides that the buyer “may commence any legal or equitable action to which the Buyer may be entitled.” This means that the buyer can sue in court for his damages and may also ask the court to order the seller to convey the property to him.
Should residential real estate contracts contain a LIQUIDATED DAMAGES CLAUSE? There’s no one answer – it depends which side of the table you’re on. When I represent a buyer, I try to avoid that clause and leave the seller to his remedies, same as the buyer. When I represent a seller, I try to get a hefty deposit and a clause providing that the seller keeps it all if the buyer breaches the contract.
DISCLAIMER – This article is for general information only and is not intended to provide legal advice or to address specific legal problems. This article does not create an attorney-client relationship. For legal advice concerning real estate transactions and all other legal matters, consult an attorney.
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Failure to Close – Residential Real Estate
UNDERSTANDING THE CONTRACT’S “FAILURE TO SETTLE” CLAUSE
Once all the contingencies in a contract for the purchase and sale of residential property have been satisfied, the parties are obligated to proceed toward closing. But what if, after all that, the buyer refuses to go through with the purchase? Sellers often assume that they get to keep the buyer’s deposit, but this is not necessarily the case. What if it is the seller who refuses to go through with the sale? The answers to these questions should be found in the contract, in a section usually headed FAILURE OF BUYER OR SELLER TO SETTLE.
IF THE BUYER FAILS TO CLOSE WHEN OBLIGATED TO DO SO, the contract may or may not provide for LIQUIDATED DAMAGES. Buyer’s failure to close is a breach of contract entitling the seller to damages. Damages means that the buyer pays the seller to compensate the seller for his losses because of the buyer’s breach of contract. Depending on the circumstances, the seller’s costs may include the cost of relisting the property, any real estate commission which the seller has to pay according to the listing agreement between the seller and his realtor, non-refundable relocation expenses, and the taxes and insurance premiums the seller has to continue to pay. If the seller ends up selling the property to another buyer for less, his damages will include the difference between the two prices. Damages do not include amounts to assuage the seller’s angry feelings or punish the buyer.
The usual rule in contract law is that a person damaged by a breach of contract can sue for his losses. Part of the process is proving in court exactly what his losses are, and how much is necessary to “make him whole.” Once he has a judgment for a particular amount, he must then collect the amount from the breaching party. Residential real estate contracts can provide that this usual rule applies to a breaching buyer.
But, the parties can choose a different procedure. One choice is the use of a LIQUIDATED DAMAGES CLAUSE. This says that the parties are able to estimate the damages that would be caused by the buyer’s breach of contract, that the estimate is equal to all or a portion of the buyer’s deposit, and that if the buyer breaches the contract, that amount of the deposit will be paid to the seller. The clause should also say that the amount is liquidated damages and not a penalty; the purpose is to “make the seller whole,” not to punish or deter the buyer. The amount must be reasonably related to the amount of damage the seller is likely to incur.
Sometimes the FAILURE TO SETTLE CLAUSE will say that the seller cannot recover any more damages than the deposit amount – he takes the deposit (or a portion of it) and both parties walk away. Most of the time, this is the most desirable option for the seller. He does not have to go to court, or prove his damages. He can take his money, forget about the old buyer, and concentrate on finding a new buyer. (If, however, the seller has accepted a very low deposit, he might not think this option is so great.)
Other times the LIQUIDATED DAMAGES CLAUSE will say that the seller can sue the buyer for his damages and that the deposit will be used to pay the damages awarded by the court, if any. The advantage to the seller is that if he gets an award, the deposit is available to pay it, at least to the extent of the deposit. This relieves the seller of the burden of collecting on his judgment, at least to the extent of the deposit. The drawback is that he still has to go to court.
IF THE SELLER FAILS TO CLOSE WHEN OBLIGATED TO DO SO, it is the buyer who’s damaged. The seller may have been planning to move to take a job elsewhere, and the job evaporated, or seller may have fallen ill and wants to stay put, or seller is moving into new construction which is not ready, or many other scenarios. Meanwhile, the buyer has incurred substantial costs for inspection, borrowing, title work, relocation expenses, etc. and may have resigned a job or sold his previous house in anticipation of the move, to say nothing of perhaps having no place to go. The FAILURE TO SETTLE CLAUSE usually provides that the buyer “may commence any legal or equitable action to which the Buyer may be entitled.” This means that the buyer can sue in court for his damages and may also ask the court to order the seller to convey the property to him.
Should residential real estate contracts contain a LIQUIDATED DAMAGES CLAUSE? There’s no one answer – it depends which side of the table you’re on. When I represent a buyer, I try to avoid that clause and leave the seller to his remedies, same as the buyer. When I represent a seller, I try to get a hefty deposit and a clause providing that the seller keeps it all if the buyer breaches the contract.
DISCLAIMER – This article is for general information only and is not intended to provide legal advice or to address specific legal problems. This article does not create an attorney-client relationship. For legal advice concerning real estate transactions and all other legal matters, consult an attorney.