In the last five years we've seen a huge decline in the housing market. What does this mean for buyers and sellers? More breaches of property purchase agreements. If you are considering purchasing or selling a property or you are currently in litigation involving a breach of a purchase agreement, it is import to understand what remedies are available to you. In this two part article, we first discuss the remedies available to sellers in case of a buyer breach. In part two, we will discuss the remedies available to buyers in case of a seller breach.
A seller has two basic alternative remedies available to them in case a buyer breaches the purchase contract: a general damages action for breach of contract or specific performance.
General damages are the difference between the contract price and the value of the property at the time of the breach. Because it is sometimes difficult to determine when the contract was breached, courts will value the property at the time of the closing date specified in the contract.
What is important to remember about the general damages rule is that a seller can only really recover damages if: (1) the purchase price in the contract was higher than the value of the property at the time the contract was entered into (meaning the buyer agreed to pay above the fair market value) or (2) if the purchase price in the contract was equal to the property's fair market value at the time the contract was entered into, but the property depreciated in value at the time of the breach (closing date of the contract). Thus in a stable or appreciating market, the seller is unlikely to have suffered general damages by the buyer's breach.
What can a seller do to protect him or herself from a breach in a stable or appreciating market? A liquidated damages clause. Parties to a contract sometimes choose to include a liquidated damages clause in the purchase agreement. A liquidated damages clause provides for a fixed amount in damages in case one or the other party breaches the contract. This is advantageous because the court will award the fixed amount of damages set forth in the contract instead of looking to the difference between the contract price and the value of the property at the time of the breach.
As an alternative to general damages, a seller can seek specific performance. Specific performance is where the court orders the buyer to perform as required by the purchase agreement. There are certain requirements that must be met before a court allows specific performance as a remedy: (1) an award of money damages will not adequately compensate the seller; (2) the buyer received adequate compensation (i.e. the property); (3) performance of the contract will not cause undue hardship to the buyer; (4) the terms in the contract are certain enough for the court to be able to determine exactly what performance is required by the buyer; (5) the performance that the seller wants the court to order is similar enough to the performance required by the contract; (6) the contract is not illegal or the result of fraud, unfair practice or mistake; (7) the seller has performed his duties under the contract; (8) the performance does not require impractical or impossible supervision by the court.
While we have only discussed general damages and specific performance here, there is also a possibility for consequential damages and interest. Please stay tuned for a discussion on consequential damages in my upcoming blogs. Also please stay tuned for Part II of this article, where we discuss remedies available to a buyer in case of a breach by a seller.