Going through the trouble of writing contracts is not always enough to protect yourself from breach or contracts simply falling through. Even if you had a strong real estate contract in place, there are typically ways it can fall through or be breached, allowing you to claim damages and other relief.
The commercial real estate contract itself will typically provide for damages or place money in escrow specifically so you can recover at least something if the contract falls apart. For example, sellers keep earnest money deposits if the buyer backs out in violation of the contract. In some cases, there may be additional consequential damages our lawyers can help you claim through demand letters or taking the other party to court.
For help with your case, call our Baltimore commercial real estate lawyers at Heyman Law Firm at (410) 305-9287.
How Escrow Protects Recovery
Most real estate contracts put money in escrow so that neither party can access it while the contract’s terms are carried out. This ensures that if something does go wrong, the neutral account will pay the money to the party that is supposed to get the money under the contract.
What Money Goes into Escrow?
Any payments that are made up front and are not delivered until the contract is complete typically go into escrow. This often includes earnest money deposits by the buyer.
Other prepayments may also go into escrow.
What Happens to Money in Escrow if There is a Breach?
What happens to the money depends on who breaches the contract and why. Generally, the money in escrow is going from the buyer to the seller, and keeping it there ensures the seller still gets the money if the buyer backs out.
If the seller breaches, the money will go back to the buyer.
What Happens to Money in Escrow Without a Breach?
However, the buyer is allowed to back out of the contract for many reasons, depending on the terms. This will typically include things like inspection and zoning contingencies, where if there are issues found during due diligence, the buyer can back out and take their money back.
The buyer does not commit a breach here but rather activates escape hatches built into the contract. Having the money in escrow helps protect the buyer from losing the money if the seller were to decide to keep it.
What Constitutes a Breach of Real Estate Contracts?
To recover anything for a breach of contract, there needs to be an actual breach. As noted above, exercising your rights under a contingency is not a breach, but is perfectly allowed under the contract’s terms.
Instead, breaches usually come in these forms:
Seller Refuses to Deliver
If the seller changes their mind about selling the property after they already signed a contract, that is a breach. The seller is contractually obligated to deliver that specific property, and so they can be taken to court and forced to do so.
Buyer Changes Their Mind
If the buyer backs out of the sale, then the seller is out the purchase price, plus other potential damages (e.g., costs associated with their plans to move or wind down business practices at that location). It may take them time and additional expense to find a new buyer, and a new buyer might not offer as much as this buyer was offering.
If the buyer had a contingency allowing them to back out, there is no breach. If they had no contingency and backed out anyway, that is a clear breach.
Buyer Refuses to Pay
If the buyer does not pay the full purchase price, the seller can refuse to deliver the property. However, this is a breach of contract and causes similar issues as when the buyer drops out of the sale.
Parcel Delivered Did Not Match
Real estate contracts are for that specific plot of land. If the parties get closer to closing, and the property they are delivering does not match, that is a huge problem.
Problems with title or parcel size are often discovered before closing, allowing the parties to potentially renegotiate and move forward with a lower purchase price for a smaller property. Other times, they are material issues that halt the sale or allow the buyer to back out under a contingency.
Promised Repairs or Changes Were Not Made
Sometimes real estate contracts have requirements, such as repairs that will be made before the buyer takes the property. If the seller did not make required repairs, they breached the contract, and the buyer can back out through contingencies or press on and potentially seek damages for the breach.
Damages Available in Real Estate Breach of Contract Cases
When these issues arise, these damages are often available to the buyer or seller:
Buyer
- Additional costs of looking for a new, suitable property
- Liquidated damages listed in the contract – e.g., return of earnest money deposits
- Expenses and deposits already in place for closing day, move-in, and readying the property (e.g., deposits with a contractor to start renovations on Day 1 of ownership)
Seller
- The expense and time of having to find a new buyer
- The lost money if a new buyer offers less
- Costs of repairs made under the contract, especially if they now need to be reversed to sell to someone else
Can You Get Specific Performance?
While damages are often an important thing to recover in real estate contract breaches, you may be entitled to specific performance. This would require the court to force the parties to take specific actions required under the contract, such as forcing the seller to go through with the sale.
Real estate contracts often allow for relief to include specific performance, given that no two properties are identical, and you cannot just find a substitute if the seller refuses to sell.
Even with specific performance, there are usually expenses you can claim as damages, such as the lost time, profits, and legal fees from the delayed sale.
Can You Get Damages for Minor Breaches?
Sometimes. Generally, a minor breach is not going to be enough to stop the transaction from going through, and usually involves issues like clutter, waste, or materials the seller left at the property.
Some of these might require significant expense to dispose of, especially at industrial or manufacturing properties. The buyer can typically bring a claim against the seller for these costs under the terms of the contract, but they are not serious enough to stop the sale.
Can You Get Damages for Anticipatory Breach?
Typically, yes. Anticipatory breach means that one side is saying in advance that they will not comply with the contract, rather than getting to the closing date and failing to comply. This may reduce overall damages – e.g., by giving the other party more time to start looking for a new buyer/seller – but it does not stop damages or breach of contract claims from happening.
Do You Need an In-House Lawyer for Real Estate Contract Issues?
Not at all! Our real estate lawyers often work with businesses big and small as if we were your in-house counsel to help with real estate contract issues and breach of contract cases.
Call Our Commercial Real Estate Lawyers Today
Contact Heyman Law Firm at (410) 305-9287 to talk to our commercial real estate attorneys about your potential case.