Contract Law - Part 4 - Chapters 48-50 Flashcards
Determine when a buyers breach of a purchase agreement and escrow instructions entitles a seller to recover monetary losses
A buyer, due to their breach of the purchase agreement, owes the seller there actual money losses caused by the breach, called damages which are classified as:
- GENERAL DAMAGES for their dollar amount of any decline in the property’s fair market value below the price agreed to in the purchase agreement
- SPECIAL DAMAGES for transactional costs, marketing expenses and any further drop in property value after the buyer’s breach if the buyer interferes with resale efforts and
- INTEREST from the date of the buyer’s breach to the closing date of the resale of the property.
To limit the breaching buyers liability, the sellers loss on a resale at a price lower than the price agreed to buy the breaching buyer is limited to the amount of the value decline which occurs by the date of the buyers breach, not the date of the resale. Any further decline in value after the date of the breach to the date of the resale is recoverable only if the buyer interferes with the sellers diligent resale efforts.
Buyer interference with resale efforts typically consists of filing a specific performance action and recording a notice of Lis pendens, or taking possession and refusing to vacate.
Discuss a sellers claim to recover losses on a resale following their buyers breach of a purchase agreement
A seller’s total recoverable losses include:
- the operating and carrying costs of mortgage interest payments, taxes, Insurance, maintenance and utilities, incurred by the seller during the period between the date of the breach and the date escrow closed on the resale
- The increased closing costs due to the sellers payment of the new buyers non-recurring closing cost and financing fees on the resale which reduced the sellers net proceeds compared to the net proceeds the seller was to receive from the breaching buyer
- the additional resale cost of the prepayment penalty demanded by the lender on the mortgage payoff
- interest on the sellers net Equity from the date escrow was too close to the date of closing on the resale.
A seller of real estate who is faced with a breaching buyer and the failure of a sales transaction need to probably decide whether to:
- enforce the purchase agreement,
- remarket the property for sale and diligently seek a buyer or
- retain the property and postpone or entirely forgo any resale effort.
A seller who takes the property off the market or is not diligent in their efforts to resell is limited in their recovery of money to their actual transactional expenses and any operating expenses incurred to fulfill the sellers performance under the purchase agreement up to the time of the buyer’s breach. Ownership and operating expenses incurred by a seller who chooses to either retain the property or delay reselling the property are not recoverable.
A seller is also entitled to interest on the losses and expenditures they recover for the decline in property’s value, expenses of the transaction, resell related expenses and the caring cost of the property during the resale effort.
general damage
A buyer, due to their breach of the purchase agreement, owes the seller their actual money losses caused by the breach, called damages, which are classified as General Damages, Special Damages, Interest, Offsets or Credit’s due to the buyer.
GENERAL DAMAGES are money losses by a buyer or seller due to their expenditures and loss of value directly related to a failed property sales transaction. General damages include the dollar amount of any decline in the property’s fair market value as of the date of the buyers breach below the price agreed to in the purchase agreement.
implicit rent
IMPLICIT RENT is the dollar value of the use of a property by the owner. Note the buyer is due a credit for the rental value of the seller’s occupancy, called implicit rent, and any rent income received by the seller from the property after the buyer’s breach.
net sales proceeds
NET SALES PROCEEDS are the sellers receipts on closing a sale of their property after all costs of the sale have been deducted from the gross proceeds.
price-to-value difference
The PRICE TO VALUE DIFFERENCE is the difference between the price agreed to in a purchase agreement and the value of the property on the date the agreement is breached.
special damages
SPECIAL DAMAGES are money losses not incurred directly from another’s breach of the real estate agreement, but which are naturally incurred as a result of the breach. Also known as CONSEQUENTIAL DAMAGES. These damages include:
- transactional costs incurred by the seller while preparing to close under the breached purchase agreement
- marketing expenses, increase closing costs and ownership and operating cost incurred to remarket and sell the property and
- any further drop in property value after the buyer’s breach for as long as and only if the buyer interferes and stalls the sellers resale effort.
specific performance action
A SPECIFIC PERFORMANCE ACTION is a request of a tribunal to compel performance of an agreement, such as the delivery of title or money under a purchase agreement or assignment of rents.
Buyer interference with resale efforts typically consist of filing a specific performance action and recording a notice of Lis pendens, or taking possession and refusing to vacate.
Advise a buyer on the need in a falling real estate market to agree to limit for their liability exposure if they breach their purchase agreement
If a buyer and seller do not agree to either a liquidated damages provision or a contract liability limitation provision, the buyer who enters into such a purchase agreement and breeches is liable for an unlimited amount of losses incurred by the seller due to the buyer’s breach. In the economic environment of a stable resale market for property or one of generally Rising prices, the buyer takes little risk when entering into a purchase agreement without a ceiling on their liability exposure.
However, it is for buyers in a static Market or one following a peak in prices or when mortgage rates rise that the buyer’s agent needs to be diligent in their protection of the buyer by explaining the need for a ceiling on liability exposure. Otherwise, when the value of the seller’s property has dropped below the sales price, the defaulting buyer ends up being liable for often large amounts of seller losses.
As for the seller’s agent, they are to advise their seller in times of weak or weakening pricing power to avoid agreeing to a ceiling on the buyers liability and to obtain a larger deposit.
A seller of real estate who is faced with a breaching buyer and the failure of the sales transaction needs to promptly decide whether to enforce the purchase agreement, remarket the property for sale and diligently seek a buyer or retain the property and postpone or entirely forgo any resale effort.
Use of a liquidated damages provision is an attempt, by its wording, to:
- limit the buyer’s responsibility for payment of losses they inflict on a seller and
- provide the seller with a windfall at the buyer’s expense.
Determine the dollar amount of a buyer’s good-faith deposit or more a seller is entitled to receive when a buyer breaches a purchase agreement
The breaching buyer owes the seller the sellers actual money losses, expenditures which will not be reimbursed on a resale. Thus, the seller has claimed on the buyers good faith deposit as a primary source for recovery of money losses. The seller may make a demand for all or a portion of the good-faith deposit at either:
- the time of the breach or
- after closing a resale of the property when a loss, if any, is known.
When a liquidated damages provision is included in the purchase agreement for a 124 unit residential unit and the buyer and seller both initial to provision, they have agreed by the wording that the buyers good faith deposit is to be forfeited to the seller on a breach by the buyer.
To recover any amount of the deposit, the seller needs to have money losses to justify their retention of any or all of the liquidated damages deposit. Thus, the total amount of the deposit – arbitrary for losses and coincidental to the price paid - has no legal relationship to the losses the seller may suffer on the buyer’s breach beyond security for the recovery of actual losses.
Thus, the sellers failure to refund (or release) the amount exceeding their losses is a breach by the seller of the liquidated damages provision in the purchase agreement.
Assess the reasonableness of a seller’s claim on a breaching buyers deposit under a purchase agreement containing a liquidated damages or other liability limitation provision
When an initialed liquidated damages provision is included in a purchase agreement, the breaching buyer avoids the forfeiture called for by challenging the presumed validity of any amount up to 3% of the purchase price.
For the seller to enforce a forfeiture of any portion of a deposit exceeding 3% of the purchase agreement price, the seller needs to challenge the presumed invalidity of the excess by demonstrating in an accounting that their losses on the sale exceeded 3% of the purchase price.
The liquidated damages provision becomes a promise by the seller to refund that portion of the deposit which exceeds the seller’s recoverable losses, due to either:
- a buyer’s challenge of the forfeitures reasonableness or
- the forfeiture amount being in excess of 3% of the purchase price.
forfeiture
FORFEITURE is the loss of money or anything of value, due to failure to perform. When the amount of the forfeiture exceeds the sellers losses, the buyer can void the provision as unreasonable. Thus the liquidated damages provision is voidable as it is only presume to be valid if the amount is reasonably close to actual losses.
NOTE - A liquidated damages provision is voidable if the amount is not reasonably close to actual losses.
good faith deposit
A GOOD FAITH DEPOSIT is a money deposit made by a buyer to evidence their good-faith intent to buy when making an offer to acquire property, also called earnest money. The good faith deposit, even if released to the seller after contingencies have been removed, remains the buyers money until:
- the buyer receives consideration (the property) or
- the deposit is offset to reimburse the seller for their actual money losses suffered due to a breach by the buyer.
liquidated damages provision
A LIQUIDATED DAMAGES PROVISION is a provision in a purchase agreement setting the maximum dollar amount a seller may recover from the buyer on the buyer’s breach. The liquidated damages provision has a “split personality” aspect:
- the responsibility of the buyer is to challenge the presumed validity of a forfeiture of 3% or less,
- the responsibilities of the seller is to challenge the presumed invalidity of a forfeiture of 3% or more.
In general, Liquidated Damages Provisions, other than on the sale of one to four residential units to a buyer occupant, are presumed to be valid. however, they are also classified as forfeitures and are unenforceable if they do not represent an amount which bears some reasonably close relationship to the actual losses the seller will incur due to monetary harm inflicted on them by the buyers default.
seller’s net sheet
A SELLER’S NET SHEET is a document prepared by a seller’s agent to disclose the financial consequences of a sale when setting the listing price and on acceptance of a buyer’s price in a purchase offer. A fairly accurate representation of the money losses the seller incurred is calculated by a comparison of the net proceeds received on the closing of a RESALE with the sellers net sheet estimating the net proceeds the seller was to receive on the CANCELED sale. If the comparison of the net sheets on each transaction presents evidence the seller received less proceeds on the resale, the seller has a factual basis for recovery.
