When a real estate seller it trying to back out of the contract and is trying to return the earnest money deposit, the buyer may have important rights to enforce the contract and force the sale of the real property.
The buyer can sue for specific performance for compliance with the contract plus request money damages and costs of suit to compel the sale.
In the same lawsuit, the buyer can file a notice of pendency (lis pendens) to notify third parties about the existence of a case involving the real property. The buyer can also file an application for temporary restraining order and preliminary injunction to prevent the seller from selling the property to someone else.
Specific performance plus damages and costs of a lawsuit
When a seller backs out of the contract outside of any contractual provision allowing him to cancel the contract, the buyer can force the sale of the property to him by suing for specific performance. A suit for specific performance compels the seller to specifically perform his obligations under the real estate contract he is trying to breach. The buyer must show the Court that he is willing and able to buy the property by, for example, showing appropriate financing from a lending institution.
A buyer’s suit for specific performance is generally more successful than a seller’s suit for specific performance because the Court is more likely to order the seller to sell the property than order a buyer to purchase a property when the buyer has no means to and/or when the seller can be properly compensated by the forfeiture of the earnest money deposit.
The damages likely to be granted in a suit for specific performance would be the attorney’s fees of the buyer who had to resort to legal action to protect and enforce his rights and other costs of suit, such as court fees.
In the same action for specific performance, the buyer can file a notice of pendency (lis pendens) that describes the action and serves as constructive notice to third parties who shall be bound by the outcome of the litigation. The notice of pendency will appear in the title search and notify third persons that the property is under litigation. This will deter future buyers from purchasing the property.
The buyer can also file in the same action an application for temporary restraining order and preliminary injunction. If granted, the Court’s order will prevent the seller from selling the property to third persons pending litigation.
Return of earnest money deposit plus interest and damages
In case the buyer does not wish to continue with the sale, he can demand for the return of his earnest money deposit plus interest and damages. Actual damages are expenses the buyer incurred during the sale process and as a result of the breached contract, such as temporary housing costs, due diligence expenses, legal fees, inspection fees, storage expenses, and HOA application fees, whichever is applicable, to name a few. The buyer can also demand for punitive and liquidated damages (if provided in the contract).
Notice of pendency (lis pendens) to stop sale to a new buyer
Under New York Civil Practice Law and Rules (CVP) § 6501 and Rule 6511, a notice of pendency can be filed in any action in a court in which the judgment demanded would affect the title to real property. It can be filed before or after service of summons and at any time prior to judgment. This notice shall state the names of the parties to the action, the object, and the description of the affected property. The notice is constructive notice, from the time of filing, that any purchaser or incumbrancer of such real property shall take the property, subject to the outcome of the existing litigation.
The notice of pendency will appear in all title searches related to the real property. This would deter prospective purchasers from buying the property because of the risk that the property would ultimately be granted to the other party, and not the seller, in the court action.
Although the notice of pendency can discourage a prospective buyer from purchasing the property, it does not prohibit the seller’s sale of the property. Some prospective buyers are willing to purchase property, even with a notice of pendency (lis pendens), especially when the property is heavily discounted due to the lis pendens and it appears that the seller has a strong case. To completely prohibit the seller from selling the property, the remedies are temporary restraining order and preliminary injunction.
Temporary restraining order and preliminary injunction
A temporary restraining order and preliminary injunction generally produces the same result of restraining the commission of a particular act that would cause irreparable injury, except for the procedure and time it can be granted. Under CVP §§ 1333 and 6313, the temporary restraining order can be granted without notice to the other party, while a preliminary injunction can only be granted upon notice to the defendant and after hearing. The temporary restraining order can be issued before a hearing on the motion for preliminary injunction is held, without notice to the defendant and upon showing of the applicant that immediate and irreparable injury, loss or damages will be incurred before a hearing can be had.
In the case of a buyer, the remedies of a temporary restraining order and preliminary injunction are proper because the sale of a house to a third person can cause irreparable injury that cannot be simply compensated by monetary damages. It is difficult to find a house that someone likes, and once it is sold to another person, it might be difficult to find another house again within the same price range. There are also sentimental and emotional considerations in purchasing a home, and for this reason, the remedies of a temporary restraining order and preliminary injunction can prevent the seller who wishes to breach his contract with the buyer from selling the real property to another buyer.
These remedies of temporary restraining order and preliminary injunction are normally used in conjunction with an action for specific performance.
Seller legally backing out of a contract
There can be some situations where the seller can legally back out of a contract, such as:
- when backing out is based on a contractual provision, either for the benefit of seller or buyer
- when the seller has convinced the buyer to agree to cancel the contract
- when there is proof that the buyer committed fraud
- when the purchase contract is not in writing
In these cases, the seller can back out of the contract without legal ramifications. Although the buyer can sue for specific performance, the probability of success may be lesser.
When it’s hard for seller to back out of a contract
When the seller backs out of the contract for reasons other than those provided above, such as when the seller gets a higher offer or experiences seller’s remorse, the seller may have to face legal and financial consequences of his actions.
Though the seller does not have any earnest money deposit to lose, the buyer can file an action for specific performance plus costs of suit or the payment of damages. Specific performance will compel or force the seller to continue with the sale. In the alternative, aside from the return of the earnest money deposit plus interest, the buyer can demand actual, punitive, and liquidated damages related to the expenses the buyer incurred during the sale process and as a result of the breached contract, such as temporary housing costs, due diligence expenses, legal fees, inspection fees, storage expenses, and HOA application fees, as applicable, to name a few.
Because legal fees can be expensive, a compromise by way of financial settlement is normally concluded between the buyer and the seller in this case.
Seller using buyer’s contingencies to legally back out of the contract
Generally, buyers in real estate contracts are given contingencies, allowing them to back out of the contract without penalty in certain circumstances.
- when the buyer does not get a loan (financing contingency)
- when the buyer is not able to sell his own house so he can buy a new house (home sale contingency
- when the appraised value of the seller’s property is substantially lower than the selling price (appraisal contingency)
- when the inspection of the house shows problems that need repairing (home inspection contingency)
In these cases, it is the buyer who has the option to cancel the contract. However, in the case of home sale contingency, appraisal contingency, and home inspection contingency, the seller can encourage the buyer to cancel the contract.
In an appraisal contingency when the appraised value is lower than the selling price, the buyer normally requests the seller for a discount based on the appraised value. If the seller refuses to provide a discount, the buyer has the option to cancel the contract. This allows the seller to back out of the contract, using the buyer’s contingency.
In a home inspection contingency, the buyer normally requests for a discount from the seller to account for the repairs to be made as a result of the home inspection. If the seller refuses to provide a discount or to make the necessary repairs prior to closing, the buyer can cancel the contract.
If home sale contingency for the buyer is present in the purchase contract, the seller can normally demand that it can cancel the contract for whatever reason, especially when it receives a higher offer. The seller would normally insert a provision in the contract that would allow him to cancel at anytime because he does want to wait for the buyer to sell his house, especially when there is another offer on the table.
Mutual agreement to keep the contract or compensate the real estate buyer
The seller can also cancel the contract without any reason or for a reason outside of the contractual provisions if both the seller and buyer mutually agree to terminate the contract without penalty. With the buyer and seller’s mutual agreement on termination, the seller does not incur any penalty for cancelling the contract.
Buyer’s fraud is a good reason to back out of the contract for the seller
If the buyer committed fraud, the seller can rescind the contract based on equity and common law even if there is no contractual provision allowing such rescission. However, the seller must rescind the contract at the earliest possible time to avoid any misconception that the seller has ratified and affirmed the contract. In Hammond v. Pennock, 61 N.Y. 145 (1874), even if there is no intent to defraud, as long as there is a suppression or misrepresentation of a material fact, there is basis for rescinding a contract in equity. This ruling has been affirmed in subsequent decisions of the Court.
In Jack Kelly Partners LLC v. Zegelstein, 140 A.D.3d 79 (N.Y. App. Div. 2016), the Court held:
“Further, fraud sufficient to support the rescission requires only a misrepresentation that induces a party to enter into a contract resulting in some detriment; proof of scienter is not necessary and even an innocent misrepresentation is sufficient for rescission (see D’Angelo v Hastings Oldsmobile, 89 AD2d 785 [4th Dept 1982], affd 59 NY2d 773 ; see also Seneca Wire & Mfg. Co. v Leach & Co., 247 NY 1, 8 ).”
In application, fraud normally occurs in the purchase of real estate contracts when young aggressive purchasers prey on unsuspecting elder sellers, inducing them to sell at blatantly low prices.
When you cannot file a lis pendens
If you don’t qualify for a mortgage or you are no longer interested in buying the property and you just want your deposit back, then you can sue the seller for the deposit but you probably cannot place a lis pendens on the property because the lawsuit is not about the property, it’s only about the deposit.
A real estate contract has to be in writing
Under General Obligations Law § 5-703(2), a contract for the sale of real property is void if it is not in writing:
“A contract … for the sale, of any real property, or an interest therein, is void unless the contract or some note or memorandum thereof, expressing the consideration, is in writing, subscribed by the party to be charged, or by his lawful agent thereunto authorized by writing.”
Thus, the purchase and sale of real estate needs to be in writing. Otherwise, it is not enforceable due to non-compliance with the Statute of Frauds, which requires certain agreements to be written. When the seller has verbally agreed to a sale but changes his mind before signing the purchase agreement, the seller incurs no penalty in backing out of the verbal agreement.
Given above situations, a seller can back out of a contract to sell his property, but most of the time, there are legal ramifications. If the buyer is determined to purchase the property, the buyer can file an action for specific performance plus damages, notice of pendency, temporary restraining order, and preliminary injunction. Because legal fees can be expensive, a compromise by way of financial settlement is normally concluded between the buyer and the seller in this case. The seller, seeking to back out of the contract, would have to pay an amount to compensate the buyer.
If you have a dispute involving a real estate contract, it is important to review the contract itself for any provisions that could work for your benefit. If you are a buyer seeking to enforce the sale of real estate against the seller, we at the Law Offices of Albert Goodwin, are here for you. You can call us at 718-509-9774 or email at firstname.lastname@example.org.