We have encountered parties to real estate transactions who get “cold feet” between the time of contract signing and closing. These persons may seek to break the legally binding contract that they have signed and cancel the deal. This post will address when failing to perform a real estate contract may be permitted and the risks involved should the contract not be able to be cancelled.
First, this issue will be examined from the perspective of the buyer. Real estate contracts typically contain conditions, such as the property will appraise for at least the contract price, that the buyer will obtain a mortgage commitment, board approval will be issued if the purchase involves a cooperative apartment and there will not be an insurmountable title issue. If any of these conditions are not met and the buyer’s attorney notifies the seller’s attorney within the timeframe required by the contract, the contract can be legally cancelled and the downpayment will be refunded to the buyer.
At times, a buyer attempts to use issues that should have been addressed during the pre-contract due diligence period to cancel the contract. Most contracts state that the buyer has conducted all due diligence and inspections of the property before the contract is signed. The buyer’s concerns about such issues as property conditions, the amount of real estate taxes, or monthly carrying costs of a cooperative or condominium unit must be raised before the contract is signed and are not causes to unravel the contract. A buyer cannot cancel the contract merely because he no longer wants the property or thinks he cannot afford it.
However, some buyers simply change their mind after they sign the contract and state that they do not want to close. Although these buyers have no legal justification to refuse to close, the seller may release them from their contractual obligations as a practical matter. Some sellers find it pragmatic to reintroduce the property in a busy Spring market where the sales price may be higher and a more proactive buyer will be located. Also, as leverage to allow the buyer to cancel the contract, the seller may negotiate that a portion of the downpayment be delivered to the seller as compensation for removing the property from the market during the contractual period and to permit the unjustified cancellation of the contract.
Now, let’s examine this issue from the seller’s perspective. Once the contract is signed, the property is removed from the real estate market and not shown to other parties. However, some sellers are insecure about their buyer’s ability to close and continue to consider backup offers. Buyers who still want a particular property may wish to be practical and offer to increase the purchase price or waive the mortgage contingency. If a particular contract allows the seller to cancel before the closing, a buyer’s downpayment could be lost by being unwilling to meet the seller’s demands. However, if the seller is merely being greedy and the buyer is unwilling to meet additional requirements, the buyer may consider placing a lis pendens on the property, so that any person searching the public records will be aware that the original buyer has a claim to purchase the property, which may discourage another person from entering a contract with the seller.
A legally proper method for either party to unravel the contract is to set a time of the essence closing. If either party does not perform on “law day”, then the contract is cancelled. The seller will retain the downpayment if the buyer fails to perform. The purchaser will have a claim for specific performance if the seller does not perform, requiring the seller to transfer title to the buyer.
Our attorneys attempt to manage the contract process so that “cold feet” can be avoided and advise as to how to prevent an unfavorable outcome.