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Can Seller Sue Buyer for Backing Out of an Offer or a Contract

Can Seller Sue Buyer for Backing Out of an Offer or a Contract

When a real estate buyer wants to back out from purchasing property, the seller would usually like to know whether he can sue the buyer for backing out.

In New York, it depends on whether the buyer has made an offer and the seller has accepted, or whether the buyer and the seller have executed a definitive purchase and sale agreement. In the case of an accepted offer, both parties can walk away without any legal consequences because offers, whether verbal or written, are generally not binding in New York. In the second case, the buyer can only back out based on contingencies provided in the purchase agreement, and in such cases, strictly within the procedure and timelines provided in the contract.

Can seller sue buyer for backing out of an accepted offer

In the case of an accepted offer, both parties can generally back out without legal and financial consequences because accepted offers are not usually considered binding contracts in New York. A buyer’s offer is usually a one-page offer in a short offer form provided by the listing agent. The offer price can still change based on the home inspection to be done after the offer and before the purchase agreement is signed because the results of the home inspection can be used by the buyer to negotiate a discount on the price to account for repairs to be made. Buyers can even withdraw the offer after acceptance. In practice, buyers can be unresponsive, and sellers and their agents usually take this as non-interest. Sellers do not have any cause of action against the buyer until a definitive purchase and sale agreement is signed.

Can seller sue buyer for backing out of a purchase and sale agreement (contract)

When a buyer and seller both sign a definitive purchase and sale agreement that contains the selling price, contingencies, and other terms and conditions of the sale, the seller can sue the buyer for backing out of the contract without legal justification. In New York, a purchase and sale agreement is accompanied by a deposit of earnest money equivalent to 5% to 10% of the purchase price. When the buyer backs out without legal justification, the seller usually forfeits the earnest money and does not return it to the buyer.

What are possible legal justifications for a buyer to back out of a purchase agreement? It really depends on what contingencies your attorney was able to negotiate for you. In New York, the contingencies relate to the right of first refusal, board approval, financing, appraisal, and home sale.

Board approval contingencies are applied in purchases of co-ops in New York. To buy an apartment in a co-op building, the board must approve the sale. If the board denies the sale, both the buyer and seller can back out of the contract without any legal and financial consequences. Co-op boards can deny sales for whatever reason, but usually, deny when the buyer’s financials are at the lower end of the Board’s requirements and the buyer cannot place 1-2 years’ worth of maintenance dues in escrow or have his maintenance obligations guaranteed by a third party. To cancel the contract under the board approval contingency, the buyer must have applied to buy the apartment in good faith and must have provided the board with all the required documentation.

Right of first refusal contingencies applies in condo buildings in New York. The board in condos usually has a right of first refusal to purchase the condo unit before it is offered for sale to a third party. For this reason, to complete a condo sale, the board needs to issue a waiver of the right of first refusal. However, most boards don’t have the cash to purchase the condo unit, so this contingency is rarely used.

The financing contingency is one of the most common contingencies in a real estate contract. The sale is conditioned upon the buyer acquiring a loan to finance the purchase. There are specific periods to be observed in canceling the contract based on this contingency, and these periods have to be strictly observed. Otherwise, the right to cancel the contract based on this contingency will lapse. For this reason, it is important to timely exercise the right of cancellation based on financing contingency, strictly following the terms of the contract.

When the house is appraised with a value lower than the purchase price, an appraisal contingency allows the buyer to back out of the contract. For example, if the buyer makes an offer of $250,000 but the bank’s independent appraiser appraises the property only for $200,000, the buyer can either pay the difference (since the bank will only loan based on the appraisal amount) or use the appraisal contingency to cancel the contract without financial consequences.

Lastly, home sale contingency is usually predicated on the buyer, being able to sell his own home first in order to fully execute the contract to buy the other property. This contingency is rarely accepted by sellers.

When these contingencies are included in the purchase agreement, the buyer can exercise the right to cancel the contract based on the contingencies, usually without legal consequences. His earnest money will be returned to him upon cancellation.

The buyer may also cancel the contract based on fraud. However, fraud will have to be proved before the court, and in the meantime, the seller may refuse to release the earnest money to the buyer.

Seller’s legal remedy of suing the buyer when the buyer backs out

When the buyer backs out of the contract outside of the contingencies provided in the purchase agreement, the seller usually has a cause of action against the buyer to compel the buyer to buy the property under “specific performance.” However, most sellers do not wish to sue a buyer for specific performance because a buyer who doesn’t have the money cannot perform this obligation of purchasing the property. Moreover, it will be difficult for the seller to sell the property when it is under litigation. For this reason, the wisest decision for the seller is to just forfeit the deposit of earnest money.

Buying real estate is one of the largest financial investments one can make in his lifetime. There may be times when a buyer would like to change his mind after making a deposit. Backing out of a contract can lead to legal repercussions. In these cases, it is always important to have an attorney review your remedies before actually exercising a cancellation to ensure that there are no substantial financial consequences to your actions.

If you have legal issues relating to real estate or need a real estate attorney in the closing of your purchase or sale, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at attorneyalbertgoodwin@gmail.com.