Remedies Available for Breach of a Contract to Buy and Sell Real Estate

San Antonio Texas Real Estate Attorney Trey Wilson wrote:

Unfortunately, not all real estate purchase agreements come to fruition through a closing. For a host of reasons, Buyers and Sellers sometimes refuse or fail to close on contracts -- even those that are "hard." 

In most instances, the fact that closing will not occur is known ahead of time. Sometimes, however, a party doesn't learn of the other party's intention of not honoring the contract until they are left waiting at the closing table. This is a feeling that I have heard likened to being "left at the altar on your wedding day." The financial implications can also be substantial.

Most real estate purchase and sale contracts, including the promulgated forms in Texas (TAR 1601 (residential) TAR 1801 (commercial),  expressly provide for recovery of certain damages if the opposing party breaches, including by failing to close. Generally speaking, the damages available to the non-breaching party are:

• enforce "specific performance;"

• terminate the contract and receive the earnest money; and/or

• seek damages resulting from the other party's breach.

Specific performance is a remedy of equity that Courts impose as a substitute for damages, when monetary compensation would not be adequate for the non-breaching party. In essence, under specific performance, the is Court mandating that the breaching party perform its obligations under a contract.  In the real estate contract context, the Court would order the party against whom specific performance is awarded to consummate the purchase/sale truncation by closing.

It is important to understand that "specific performance" is not an independent cause of action, but rather,  an equitable remedy, the grant of which is a matter committed to the trial court's discretion. 

Seeking to force a party to close a transaction through a lawsuit requesting specific performance may sound appealing at first blush. This is especially true if you are a Seller who has been left at the closing table by a non-performing Buyer.  However, like most Court remedies, obtaining a Judgment commanding the other party to perform its contractual obligations can come at an unreasonable cost, and such Judgment may arrive way too late!  In practical terms, specific performance is sought through a brand new lawsuit that has all of the built-in scheduling -- delay in serving the opposing party, prescribed time for the Defendant to Answer, etc.  More often than not, specific performance comes too late for the non-breaching party...

Contract Termination and Recovery of Earnest Money is an option that likely appeals more to Sellers than Buyers under real estate contracts in Texas. Under this remedy, the earnest money that the Buyer has deposited with the title company/escrow officer is released to the non-breaching party. When the innocent party is the Buyer, release of the earnest money is essentially a refund of monies paid, rather than any form of compensation. When the Buyer has expended sums or incurred damages  based upon their expectation that the real estate contract would close (typical examples are inspector fees, appraiser fees, attorneys' fees, etc.), a mere refund of the earnest money will usually leave the Buyer in a position of loss, since he is put back in the position he was prior to making such expenditures.

By contrast, a Seller who receives earnest money as the result a Buyer's breach of an earnest money contract has received some compensation (though not always full compensation) for the costs and hassles associated with a contract that has not closed.  However, when the Seller has lost the opportunity to pursue another offer during the time that the then-breached contract was pending, the earnest money, alone, is rarely adequate compensation. 

Where this remedy is selected, receipt of the earnest money (whether by Buyer or Seller) typically results in a release by the non-breaching party of claims against the breaching party,  and both Buyer and Seller are free to contract with others.

Damages are generally defined as a remedy in the from of monetary compensation awarded or paid to a harmed party. In relation to breach of contract actions in Texas, they represent the cost of making the non-breaching party "whole."  These damages can include actual damages (losses related to costs incurred in connection with anticipated closing) and damages associated with lost profit and lost opportunity. As with suits for specific performance, suits for damages can be costly and time-consuming.  Further, the opposing party may not have the resources to satisfy any Judgment that may be entered.

In sum, none of the remedies available to a non-breaching party to a real estate purchase agreement are perfect. Each has its limitations, and drawbacks. Nevertheless, if you are left at the closing table, it is key to consult with an experienced Texas real estate lawyer to fully appose your options and remedies.