Refusal By Buyer Or Seller To Close on a Building Contract

When buying a home or other piece of real estate, the process generally ends with the closing state. There are two main tasks that you will need to complete during the closing stage of a real estate transaction: sign all relevant legal documents, and pay all closing costs as well as escrow items.

If you have obtained a mortgage loan in order to help you pay for the property that you are purchasing, you will most likely sign a contract between you and the lender that is providing your mortgage. You will also sign a contract between you and the seller or buyer, which will clarify the terms of transfer of ownership of the property.

In addition to these aforementioned contracts, there are several other documents that you will need to review and sign at closing. This includes, but may not be limited to:

• Certificate of Occupancy: This certificate is required to move into a newly built house;
• Mortgage Note: A mortgage note is a promise of mortgage repayment, and contains the amount and terms of the loan as well as default consequences;
• HUD-1 Settlement Statement: It is important to note that you should review this specific statement at least one day prior to closing, in the event that there are any discrepancies associated with closing costs;
• Final TILA Statement: This is a statement of the final cost of your loan, and will explain all changes to your rate and points since the initial application; and/or
• Mortgage or Deed of Trust: A mortgage or deed of trust secures the mortgage note by acting as a form of collateral for the lender, in case of default.

To put it another way, the closing is the meeting between the buyer and the seller, at which time all remaining documents related to the sale are signed. The deed to the house is transferred from the seller to the buyer. Additionally, title insurance is paid and the mortgage papers are signed by the buyer.

Any possible transfer taxes are paid to the state, and the buyer will pay the seller for any miscellaneous expenses. An example of this would be any appliances or furniture that had been previously agreed upon, as well as any real estate taxes that the seller had prepaid.

What Legal Remedies Are Available If The Buyer Defaults By Refusing To Close?

In legal terms, a remedy is a court-ordered means of enforcing one party’s rights; or, redressing a wrong that was committed by another party. Generally speaking, when a sales contract to purchase a building is drafted by a lawyer, it defines the available remedies in the event of default by either the buyer or seller.

Once a contract has been formed, both the buyer and seller agree to perform specific obligations to “close” it; or, complete the deal. An example of default would be refusing to close on a sales contract. The injured party may then bring a lawsuit against the defaulting party, generally seeking a remedy for their injuries. Remedies can be pursued in both commercial and residential purchase-sale agreements.

When the buyer of a building defaults, the remedies that are most often available to the seller include:

• Liquidated Damages: In the majority of building purchase contracts, the buyer will put down a deposit on the building that they wish to purchase. These contracts are intended to allow the seller to retain this deposit as liquidated damages in the event of a buyer’s default. Liquidated damages are predetermined damages that are assessed against one party if they breach the contract.
  • Liquidated damages provisions in contracts are generally considered to be binding, unless they are determined to be unreasonably punitive in nature. What this means is that if the fine is egregious, or so disproportionate, it will not be upheld in court; and
• Lost Profits: A breach of contract occurs when one person does not hold up their end of the bargain in a legally binding contract, which generally causes the nonbreaching party to lose money. Depending on the circumstances, this money may be recovered through the legal system. In terms of refusing to close on a building contract, if the buyer defaults, the seller can sue for the difference in money damages that were incurred as a result of failing to close the contract. This is generally calculated as the difference between the contract price and the lower fair market price, assuming that it is lower than the contract price.
  • An example of this would be if the contract specifies that the buyer pay $750,000, but the fair market value of the property is only $700,000. The seller could attempt to obtain a judgment awarding the $50,000 in lost profit. It is important to note that it is considerably uncommon for a court to order a buyer to complete the purchase by paying the entire purchase price.

Are There Any Legal Remedies If The Seller Defaults By Refusing To Close?

If it is the seller of a building that defaults, the legal remedies that may be available to the buyer include:

• Specific Performance: According to contract law, specific performance is an equitable remedy in which a court order requires one party to perform a specific act, in order to complete performance of the contract. Orders for specific performance manifest after two parties have contracted with one another, but one party has failed or refuses to perform as agreed in the contract.
  • If there is nothing in the contract which would address default, most states have determined that if the seller defaults, the buyer can take the matter to court and seek an order of specific performance. This order commands the seller, under penalty of being held in contempt of court, to transfer the property to the buyer upon payment of the agreed purchase price;
• Monetary Damages: Monetary damages refer to the amount of money that is awarded to the injured party in a lawsuit. These damages are generally paid by the party who caused the injuries, and can be imposed as a penalty, restitution, or both. Assuming that the fair market value of the property is higher than the agreed-upon contract price, the buyer can sue for the difference between the contract price and the fair market price.
  • An example of this would be how if the contract states a purchase price of $500,000 and you prove that its fair market value is $550,000, the judge may award you the $50,000 difference; and/or
• Consequential Damages: Incidental damages, also known as consequential damages, occur when a sale contract has been breached, resulting in additional expenses to the non-breaching party. These damages must occur in relation to the breach. The buyer may be able to recover costs incurred as a consequence of the buyer entering into the contract, such as mortgage application fees and appraisal fees that were paid in reliance on the contract.

Do I Need An Attorney If The Other Party To A Building Sales Contract Refuses To Close?

If a buyer or seller defaults on their obligations associated with a building sales contract, an experienced and local contract attorney will be best suited to helping you understand your legal rights and options according to your state’s specific laws. A local lawyer will also be able to represent you in court, as needed.