Warning! Be careful about signing a Real Estate Purchase Agreement unless you really want to buy or sell a property!
A real estate contract is a binding contract. Do not sign a real estate purchase agreement unless you are ready to buy or sell.
Good Morning Everyone,
As an attorney who often deals with real estate matters, I want to send out a public service announcement about an increase in litigation cases involving a failure of one or more of the parties to fulfill their obligations under real estate purchase agreement.
My client, let us call her Peggy (name changed to protect the client), signed a real estate purchase agreement to purchase a ranch here in New Mexico. The contract was a standard brokerage contract requiring the buyer enact certain provisions such as inspections and title by a certain date.
Unfortunately for my client, she had a house fire and got distracted from her duties as a buyer after she signed the purchase agreement. She missed all her deadlines (inspection, title, etc.) and was not communicative with the seller or his broker. The night before closing she emailed the seller’s broker due to financial issues from the fire and stated she wont be going through with the purchase. Unfortunately for her, she had a signed real estate purchase agreement and the seller sued her for “specific performance.” Specific performance is when a party asks the court to force the other party to perform their agreement under the signed contract. Here, the seller asked the court to force the buyer to go ahead with the the purchase. Needless to say, my client was in absolute shock. She had been involved with real estate for many years and every time a buyer would decide not to purchase, the only penalty was that the buyer would lose their earnest money.
Normally, its much more of a pain for a seller to sue a buyer for specific performance than it is to just re-list the property and sell it to someone else. However, if a specific property is difficult to sell (this one sat on the market for 18 months) or the market is slow, it may be worthwhile for a seller to sue, or threaten to sue, in order to force the sale as opposed to waiting another 18 months to find a similar buyer! This works both ways as the buyer may want to force the seller to go through with their dream property purchase.
It is imperative to understand that a purchase agreement forms a binding contract, and any failure to adhere to its terms can lead to severe legal actions against the defaulting party.
Here are some of the ramifications of signing a purchase agreement and the risks associated:
Legal Risks of Non-Compliance
- Specific Performance: A significant risk of not fulfilling a purchase agreement is being sued for specific performance. This legal remedy compels the defaulting party to execute their obligations under the contract rather than resolving the matter through financial compensation.
- As a Buyer: Failing to complete the purchase as agreed can empower the seller to seek a court order forcing you to proceed with the transaction. This could mandate the acquisition of the property under the originally agreed-upon terms, regardless of any subsequent changes in your situation.
- As a Seller: Should you decide against selling the property after entering into a purchase agreement, the buyer might obtain a legal injunction requiring you to complete the sale. This action strips you of the option to sell the property to another buyer, even if a more lucrative offer is available.
- Penalties and Damages: Deviating from the agreement's terms exposes both parties to financial liabilities, including penalties and damages for any incurred losses, forfeiture of deposits in real estate deals as a signal of commitment, and covering legal fees which can be substantial.
Terminating Purchase Agreements Without Penalty
If you have an intelligent attorney or broker, they will put specific clauses and contingencies in the contract to allow a party to terminate the purchase agreement without significant penalty.
To mitigate the risks of a purchase agreement, it's crucial to incorporate specific clauses that allow for the termination of the purchase agreement under agreed conditions, without incurring penalties. These include:
- Due Diligence Contingencies: Allow either party to terminate the agreement if due diligence reveals issues with the property or transaction that are unacceptable.
- Financing Clauses: Permit the buyer to withdraw from the agreement if they are unable to secure financing under specified conditions.
- Inspection Clauses: Enable the buyer to terminate the contract if an inspection uncovers significant property defects that the seller is unwilling or unable to rectify.
- Sale of Prior Home: Buyers can opt out if they are unable to sell their current home within a stipulated period, a common clause in residential transactions.
Incorporating these clauses offers a safeguard for both buyers and sellers, providing clear avenues to legally exit the agreement under specific circumstances, thereby avoiding the severe consequences of a breach.
In closing, it is very important to understand that if you are going to sign a real estate contract, you need to be ready to buy or sell. It is also imperative to hire a good attorney or broker to make sure you have ways to get out of the contract should that need arise!