Written by Jacob Poole | HGR Graham Partners LLP
When buying or selling a property, the parties will do so by entering into an Agreement of Purchase and Sale. This agreement sets out the key terms of the deal, including but not limited to, the purchase price, deposit, important dates, and any conditions that must be met before the transaction becomes final. Once those conditions are waived or fulfilled, the deal becomes firm and legally binding. If either party then refuses or is unable to close, they may face significant legal and financial consequences. This article explains what can happen when a buyer or seller backs out of a firm real estate transaction.
Conditional Terms and Firm Agreements
A conditional Agreement of Purchase and Sale gives the protected party (often the buyer) time to satisfy certain requirements before becoming fully committed. Common conditions include arranging financing, a satisfactory home inspection, or the sale of the buyer’s existing property. Sellers may also negotiate their own conditions, such as needing to find another home before the sale becomes firm.
If a condition is not satisfied by the specified date, the deal may end without the same consequences as walking away from a firm transaction. Once all conditions are waived or fulfilled, however, the agreement is no longer conditional. At that point the agreement has become firm, and both parties are legally bound and expected to close on the agreed date, and backing out may be a breach of contract.
Buyer Withdrawal
A buyer may fail to close for several reasons, including:
- Mortgage Approval or Appraisal Issues: A buyer may not obtain final mortgage approval, or the lender’s appraisal may come in below the purchase price. This can leave the buyer unable to fund the shortfall.
- Change of Circumstances: A buyer may have second thoughts, overextend themselves in a competitive market, lose employment, or face other financial or personal challenges. These issues do not automatically release the buyer from a firm agreement.
Buyer Consequences
Lost Deposit: If the buyer fails to close, subject to any terms of the agreement, the seller may be entitled to keep the entirety of the deposit.
Liability for Damages: In addition to losing the deposit, the buyer may also be liable for the seller’s losses if the transaction fails. The seller will generally be entitled to re-list and re-sell the property. If the property later sells for less than the original purchase price, the buyer who failed to close may be responsible for the difference between the two sale prices. The buyer may also be responsible for the seller’s reasonable costs in carrying and re-selling the property, such as mortgage payments, property taxes, utilities, insurance, legal fees, and re-listing expenses. These costs can add up quickly and may be significant.
Seller Withdrawal
A seller may also try to back out for several reasons, such as receiving a better offer, having seller’s remorse, facing a personal emergency, or being unable to find another home. Unless the agreement includes a seller-specific condition that allows termination, these reasons will not usually let the seller walk away from a firm deal without consequence.
Forfeiture of Deposit
If the seller is unable or unwilling to close, the buyer’s deposit would be returned in full. However, returning the deposit may not be enough if the buyer suffers additional losses.
Liability for Damages
The seller, may also be required to compensate the buyer for losses directly caused by the failed transaction. For example, if the buyer sold their previous home in preparation for the move and the seller then refuses to close, the buyer may be left without a place to live and may incur temporary accommodation, storage, moving, additional financing, and legal costs. The buyer may also claim other reasonable expenses that flow from the failed transaction. Depending on the circumstances, these losses can be significant and may extend well beyond the return of the deposit.
Specific Performance
In some cases, the buyer may ask the court for specific performance, which is an order requiring the seller to complete the sale. This remedy is not automatic, but it may be available where money alone would not properly compensate the buyer. The court may consider factors such as:
- Uniqueness: The property must be unique to the buyer’s intended use with comparable alternatives not being reasonably available to the purchaser.
- Adequacy of Payment: Monetary compensation does not adequately compensate the buyer for the loss of acquiring the unique property.
- Behavior of the Parties: If the seller is acting in bad faith, there may be a claim for specific performance.
The parties can also agree to cancel the deal by signing a mutual release. This requires both sides to consent. Without a valid right to terminate or a mutual release, the agreement generally remains enforceable.
Closing Remarks
Failed real estate transactions can have serious consequences. Before signing an Agreement of Purchase and Sale, buyers and sellers should think carefully about whether they need conditions to protect themselves. Once those conditions are waived or fulfilled, the agreement becomes firm, and the party who fails to close may face loss of deposit, damages, legal costs, or, in some seller-default cases, a claim for specific performance. For help navigating your legal dispute, please reach out to one of our litigation lawyers.
Please note that this article is intended for general information purposes only and is not considered legal advice.
