A real estate purchase agreement or contract of sale contains many terms and conditions that must be satisfied for the deal to close. Both parties have a lot of tasks to handle between the date the contract is signed and the closing date, typically a period of 30 to 45 days.
If the home seller or buyer fails to comply with any of these terms or conditions—perhaps the seller fails to provide clear title to the property, for example—that party is said to have breached or defaulted on the agreement. The other party might then have a legal claim against the breaching party. Similarly, if one of the parties cannot meet a contingency of the contract, such as if the buyer fails to obtain financing on the terms contemplated by the contract, the parties will be released from the contract.
Let's take a closer look at the relevant terms of conditions in a home purchase contract and how breaching these might play out.
Basic Terms and Conditions Found in Most Real Estate Purchase Agreements
Typical purchase agreements and contracts of sale contain numerous (that is, pages and pages worth of) terms and conditions to which the parties have agreed. You're likely to see:
- the home's purchase price
- a legal description or precise address of the property
- date the sale will be finalized ("closed")
- date the buyer will move in ("take possession")
- items to be included in the sale beyond the basic structure and land, such as carpeting, lighting fixtures, appliances and so forth
- items not included in the sale that the buyer might otherwise expect to be included (such as a fixture that the seller has negotiated to take along)
- various contingencies (described below)
- guarantee that the seller will provide clear title to the home, through an abstract of title, certificate of title, or title insurance policy, and
- a provision that the seller is responsible for paying house-related expenses through the closing date.
If the party who is responsible for complying with the specific term or condition fails to comply, that party has breached or defaulted on the contract.
Contingencies in the Real Estate Purchase Agreement
Purchase agreements and contracts of sale typically contain several contingencies that must be met in order for the sale to proceed. Both buyer and seller will likely want to add various contingencies in order to protect their own interests. These contingencies often include:
- the buyer hiring a home inspector and being satisfied with the results of the resulting home inspection report
- the buyer successfully obtaining a mortgage loan or other financing on specified terms
- the buyer selling his or her current house (or at least entering into a contract to do so), and
- the seller successfully finding another house to move into.
If the contingencies of sale are not met; for example, the buyer is turned down for a bank loan; the buyer and seller can cancel the contract and the buyer can get a refund of the earnest money deposit (called a down payment in New York). It's not considered an outright breach of the contract; it just means the conditions haven't been met, and the deal is over.
The average time period between the signing of the purchase contract and the closing date is 30 to 45 days.
What Happens If the Real Estate Purchase Contract Is Breached
Let's imagine that the seller fails to provide an abstract of title showing clear title to the property. In such a situation, the seller has breached the agreement. Or, if the seller takes lighting fixtures which the contract said would be left behind, the seller has breached the agreement.
In the case of a breach, the buyer might have more than one legal option. For example, a buyer who is determined to see the sale go through might agree to a modification of the contract as to the title or the lighting fixtures and the price, or might simply complete the home sale and then file a claim against the seller for breach of contract.
If the parties can't agree on how to resolve a breach (or whether a breach occurred in the first place) they must use whatever dispute resolution process has been included in the contract, if any (described below).
Sales contracts often provide for liquidated damages if one party or the other breaches the contract and the sale is canceled. This means that the damages to the party not in breach of contract will be for a set amount of money, which is often the amount of the buyer's deposit or earnest money.
Alternative Form of Dispute Resolution That Might Be Required by Home Purchase Agreement
Purchase agreements and contracts of sale often contain provisions specifying the kinds of dispute resolution that the parties must follow if they disagree on the performance of the sales contract. These can include:
- Arbitration. This involves the parties submitting the dispute to an individual "arbitrator," who is not a court officer and who decides the matter. In "binding arbitration," the parties are bound by the arbitration award and are not entitled to a court's review of arbitrator's decision, except under extremely limited circumstances.
- Mediation. This is a process in which a neutral third party guides the disputing parties and helps them find a mutually agreeable solution to the problem. If mediation fails, the matter may proceed to court.
- Small claims court. This is a division of a county court in most U.S. states, with authority to hear lawsuits in which the amount in dispute is less than a set figure, such as $7,500 in Colorado, $20,000 in Texas, and $7,000 in Massachusetts.
If your home purchase contract does not include dispute resolution provisions, you can agree to settle the dispute through arbitration or mediation, or file a lawsuit in civil court.
If you have any questions about disputes concerning a real estate purchase agreement or a contract of sale, contact a real estate attorney in your area.
Questions for Your Attorney
- What happens if the seller of property fails to fulfill the promise to provide clear title to the property?
- Can the seller require me to apply for financing from certain lenders in order to meet the financing contingency of the sales contract?
- Is suing the seller over the return of my security deposit worth the costs and effort of a lawsuit?
- If the matter can be settled in small claims court, does our state's law allow me to have a lawyer represent me?