Types of Real Estate Contracts
When it comes to real estate contracts, these contracts almost always contain terms and conditions that are somewhat standardized. If you are dealing with a real estate contract, it is important to understand its purpose and the terms it includes. By having a working knowledge of real estate contracts, you can better understand your obligations under the contract and what happens if another party to the contract does not perform their obligations. Understanding real estate contracts is the first step in gathering the information to sue for breach of contract.
Like any other contract, real estate contracts are an agreement of the parties. Real estate contracts contain several different parts, including an offer to purchase or to sell real estate, financing contingencies, disclosures related to the real estate being purchased, and the closing itself. All of these contract discrepancies can help you make recovery if you suffer damages.
Purchasing real estate is often one of the most significant financial investments that you will ever make. Dealing with a breach of contract situation can also be costly. Attorney fees , damages, court costs. These costs be significant.
Real estate contracts often include a brokerage agreement, an option contract, an earnest money contract, a land sales contract, or a lease. Regardless of which type of real estate contract you have, they will typically contain the following terms: property description, closing date, possession date, financing contingencies, failure to close liabilities, disclosure requirements, and earnest money deposits.
Contracts for the sale of real estate are often enforceable (unlike verbal ones made over the phone). The buyer and seller must sign the document before it is binding. Real estate contracts often have a provision that allows for financing contingencies whereby the buyer can withdraw from the sale without suffering penalties or damages from the seller or the realtor. There are also various disclosure requirements contained within most real estate contracts and these vary depending on the state where the contract is used.
What is a Breach of Contract in Real Estate?
While contracts can vary in their language and applicability to a particular transaction, in general, they are an agreement between two parties (the buyer and seller) for the sale of real property. Should one of the parties fail to perform their end of the bargain, or materially breach the contract, the other could have grounds to sue for damages. Depending on the particulars of the contract, a seller may be in breach of the contract if they fail to:
A breach by the seller must be material to the contract in order for the buyer to be able to seek compensation. In other words, if the breach is not significant enough to the overall purpose or intent of the contract that it would make it unjust for the offending party to seek some type of remedy, the breach may be viewed as minor. Minor breaches rarely entitle one party to damages, as the breach has not really upended the terms of the contract. For example, a breach can be insignificant if a seller sells an apartment building to a buyer but discovers afterwards that its tenants are paying less rent than agreed and thus, wants to stop the sale. However, if the seller does not go through with the sale, the buyer could sue for any damages caused by the breach such as the cost of seeking new financing or the expenses incurred in finding a new property to buy.
Legal Basis for Suing a Seller
If a seller fails to conform to the obligations of a contract, a buyer may be able to sue or otherwise force the seller to comply with those obligations. A seller is obligated to accurately disclose latent defects in a property. California Civil Code section 1102.6 states that if a seller knows about a defect in a home and does not disclose it, then the buyer can sue the seller for the cost to repair the defect plus damages.
A seller is generally obligated to convey property free from lien or encumbrance unless the buyer accepts the property subject to a certain lien. Cal. Civ. Code ยง 1476. A real estate purchase agreement often provides a date at which time the seller must deliver possession and title of the property free of any lien or encumbrance. Once that date has passed and the seller has failed to deliver possession and title in accordance with the agreement, the seller is in breach and the buyer may be entitled to a refund plus expenses.
A buyer may be able to get out of a purchase agreement if the seller completely refuses to perform its obligations under the contract. A buyer could seek specific performance pursuant to California Civil Code section 3384. Specific performance is an equitable remedy where a court simply orders the breaching party to comply with the contract.
Steps to Take Before Suing
Before you file a lawsuit, you will want to make sure that you can prove certain elements of a breach of contract claim. You can do this by gathering evidence that supports your case. This evidence may include photos, emails, text messages, and letters that relate to the situation. If these pieces of evidence show that your seller breached the contract, you can usually show that you are entitled to some type of remedy.
You will also want to review the contract to determine if a real estate breach of contract occurred and if so, what the damages of the breach are. The damages typically include some form of monetary compensation, but in some cases, other compensatory measures may be available. For example, if the buyer is suing a seller for specific performance as a result of the breach, then the buyer may be awarded the property itself plus the amount of money that it would have taken to complete the contract. In this case, the property was not only the buyer’s but the seller owed the buyer the money it was owed to complete the contract terms.
Most contracts also contain some form of dispute resolution clause, in which the parties agree to a certain way to handle potential disputes. If a buyer believes he or she has a valid claim for breach of contract and wants to sue the seller, he or she should first try to resolve the issue outside of court through mediation, arbitration, or some other way, to avoid lengthy litigation.
The Real Estate Breach Litigation Process
After you or your lawyer file a complaint against the seller in Circuit Court, they (the seller) must file a response. Typically, the response in a construction defect type case (e.g. breach of contract) is simply a denial.
After the seller files their response, there are several motions that may be filed. Oftentimes, the seller just wants to get it over with. So, many will attempt to sell you the home (or restored home) before the trial of the actual breach of contract case. Most people don’t want to have to pay for both a restoration and a whole new roof or whatever parts of the contract at issue in the transaction were breached.
Motions, however, also depend on two things: (1) whether there are experts involved and (2) whether either party is trying to have the case dismissed on a motion for summary judgment . A motion to dismiss is a request to the Courts to stop the case, because the party bringing the claim does not have a valid claim. As an example, if a spouse can prove that the other party was not married to them, then that party has no legal basis to sue the first party for divorce. If there is a fatal flaw in a claim for breach of contract, the party defending the claim would assert that the claim should be dismissed. If the Court is persuaded, the case is over; if not, then the case continues.
If necessary, the Court will hold hearings and/or conferences to help narrow the issues. If either party is interested, there is typically a mediation at some point before trial. This process involves hiring a neutral third party to sit down and attempt to settle the case between the parties. If this is not successful, then the next step is trial. Once the trial ends, the Court will render a verdict and either party may appeal.
Available Remedies and Damages
Contract damages for breach of contract are usually classified in one of three categories: 1) direct damages to compensate the injured party for a loss of bargain, 2) consequential damages to compensate the injured party for foreseeable losses caused by the breach, and 3) punitive damages. These categories are explained below.
A direct damage award is designed to give the non-breaching party what it would have received had the contract been performed. Direct damages are usually measured by the parties’ expectations at the time of the contract, and must be the direct or proximate result of the breach. Direct damages in a real estate context may include the return of earnest money, the difference between the contract price and the market price at the time of breach, and expenditures by the non-breaching party on account of the breach.
Consequential damages may be awarded where the loss was within the contemplation or reasonable foreseeability of the parties at the time the contract was made. They may include losses that result from a 1) special circumstance, known to both parties at the time of the contract, that will cause the aggrieved party a loss beyond the ordinary consequence of the breach or 2) loss outside the contemplation of the parties, but arising from special circumstances, which was within the control of the breaching party. In a real estate context, this might be a failure to timely disclose a material defect in the property, in which case the buyer might be awarded damages for repair costs, damage to their business due to lost productivity while the repairs were made, etc. The buyer will have an uphill battle in any claim for consequential damages to prove the seller’s requisite knowledge regarding the defect.
Punitive damages are not available as a contractor’s secondary remedy for breach because they are subject to constitutional restrictions. In order to recover punitive damages in a breach of contract action, the aggrieved party must prove 1) the breach was willful, malicious or, otherwise conducted in an oppressive manner, and 2) that the breach has caused actual damages. Typically, punitive damages are used in tort actions to punish the tortfeasor, deter others from like conduct, and compensate the injured party. However, in the case of a breach of contract, damages are already compensatory and if a party has suffered no damages, there can be no punitive damages.
Hiring a Real Estate Lawyer
If you have decided to sue someone with whom you have a real estate deal that has gone bad, you will need to hire an attorney specializing in real estate law. Finding an attorney that specializes in an area of law is crucial to your case and especially important to those who are suing for breach of contract. Real estate litigation cases can be complex cases that require lots of time spent reviewing paperwork, writing correspondence to opposing parties and attorneys and making phone calls to your attorney, all of which costs money. Having an attorney that is efficient will save you money in the long run. You will want to ask potential real estate attorney candidates about their previous experience with cases similar to yours. A real estate litigation attorney may have been a real estate agent or broker in the past and have tenacious experience regarding issues of non-disclosure regarding property condition/disclosure if you are working with one that is recently out of law school. Any attorney that has worked with another lawyer in this capacity will have had substantial real estate transactions experience and will obtain perspective from both sides of cases of this nature. An attorney that wants your business will take the time to provide this information before you sign any paperwork and agree to hire them. Ask lots of questions during the initial conversation, it is the only time you will get to meet directly with your attorney without the managing partner, and should provide you with enough information to be able to make an informed decision regarding potential representation. Once you have found the right real estate litigation attorney for you, your attorney will conduct research and review your proposed case, they will then make a determination regarding the strength and/or weekness of your case and your potential for winning. A good attorney will spend the time to meet with your opposing party (or their attorney) and negotiate a settlement before taking the matter to court. If your real estate litigation attorney decides that no amount of negotiation can get your case settled and it reaches the point of a trial, your attorney will need to have a thorough understanding of case law and how it applies to your case. A knowledgeable real estate litigation attorney will be able to ensure that your rights are protected and you will be getting a fair deal throughout the whole process.
Avoiding Future Breach
All of this being said, of course the best situations are the ones that do not lead to a breach in the first instance. Therefore, we strongly recommend that in any real estate transaction, one drafts the closing documents carefully so that they are clear. Without any ambiguity, the parties will be able to perform their obligations and thus there will be no basis for a breach of contract lawsuit.
In addition, where you are given a short period of time to perform some condition precedent to the closing or a closing condition, you should make sure that you have done all due diligence well in advance of the closing and then you should strictly comply with the time limits set forth in the contract. This will prevent the other party from claiming that you did not perform by the deadline.
Finally , and to the greatest extent possible, however distasteful it may be to you, you should attempt to work things out or resolve the breach in a civil fashion and on an amicable basis with the other party rather than resorting to filing a lawsuit. Under many circumstances, you can work things out. It may take a few days, it may take a few weeks or a few months but all in all, in the construction or the sale of real estate, it is usually a better practice to work things out and settle your differences with the other side and reach a mutual settlement that all parties can agree to than it is to go to court.
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