Why watch: Learn how a buyer’s breach of a purchase agreement and escrow instructions establishes the seller’s legal right to recover actual money losses.
First the seller needs a monetary loss
Consider a prospective buyer of a residence who is informed the seller has already entered into a purchase agreement to acquire a replacement residence. The seller is relying on the sale of their current residence to fund their purchase of the replacement residence.
The prospective buyer makes a written offer agreeing to pay cash for the seller’s equity and assume the existing mortgage, called a cash-to-loan transaction. The seller accepts the offer. Escrow instructions are prepared and signed, and the buyer’s good-faith deposit is placed in escrow.
Later, as agreed, the buyer deposits additional funds in escrow. Although escrow is not yet ready to close, the buyer agrees to release some of the down payment money held in escrow so the seller can close their purchase of the replacement residence. The funds are released, and the seller acquires their new residence.
The seller vacates the residence the buyer has agreed to acquire and moves their family and belongings into the replacement residence.
To consent to the buyer’s application to assume the seller’s existing mortgage, the lender demands a modification of the interest rate and payment schedule, and an assumption fee. The buyer refuses to proceed with the mortgage assumption and cancels escrow.
The buyer makes a demand on the seller to return all funds the buyer deposited into escrow, which the seller rejects.
The seller then makes a demand to be paid the funds remaining in escrow. The seller claims the buyer has forfeited all funds since they breached the purchase agreement by not assuming the mortgage on the terms demanded by the mortgage holder.
Money a breaching buyer owes the seller for losses
Continuing our example, the seller promptly re-lists the property, and it is resold for the same price.
However, the resale terms call for payoff of the existing mortgage, requiring the seller to pay a prepayment penalty. The seller also agrees to pay the new buyer’s nonrecurring closing costs and one point to buy down the interest rate on the buyer’s new mortgage.
On closing the resale transaction, the seller’s net sales proceeds are less than they were going to receive on the sale under the breached purchase agreement.
May the seller recover any money from the original buyer by either:
- retaining all the funds deposited by the buyer; or
- accounting for the resale benefits the seller received on the resale as offsets against the buyer’s deposits?
Yes! While the seller is entitled to recover their loss, they need to account for their actual money loss caused by the buyer’s breach. As always, a forfeiture of deposits is not allowed as a judicially abhorred provision, no matter the wording or initialing of forfeiture provisions.
Depending on the amount of the seller’s total recoverable loss on the resale, the buyer’s deposit will be partially or totally offset by the amount of the seller’s actual loss caused by the buyer’s breach. [Allen v. Enomoto (1964) 228 CA2d 798]
A seller’s total recoverable loss includes the:
- operating and carrying costs of mortgage interest payments, taxes, insurance, maintenance and utilities, incurred by the seller during the period between the date of the breach and the date escrow closed on resale of the property;
- increased closing costs paid by the seller to cover the new buyer’s nonrecurring closing costs and mortgage fees on the resale which reduced the seller’s net proceeds for a reduction in the net proceeds the seller was to receive from the breaching buyer;
- additional resale costs of the prepayment penalty on payoff of the seller’s mortgage; and
- interest on the seller’s net equity from the scheduled date for closing of the breached escrow to the date of closing on the resale.
Editor’s note — Stay tuned for future episodes!
