Why watch: In this new video series, you will learn to distinguish when a buyer’s breach of a purchase agreement and escrow instructions entitles the seller to recover monetary losses.
This episode covers the seller’s recovery of the price-to-value loss through to the date of the buyer’s breach, whether the seller retains the property, remarkets it or resells it.
The owner’s pivotal decision: to resell or retain
A seller of real estate who is faced with a breaching buyer and failure of the sales transaction needs to promptly decide whether to:
- remarket the property for sale and diligently seek another buyer;
- enforce the purchase agreement by obtaining a court order requiring the buyer to close escrow, called specific performance; or
- retain the property and postpone or entirely forego any resale effort.
Only money losses are recoverable
A buyer, due to their breach of the purchase agreement, owes the seller their out-of-pocket money loss caused by the breach, called damages, classified as:
- general damages which include the dollar amount of any decline in the property’s fair market value (FMV) on the date of the buyer’s breach below the price set in the purchase agreement;
- special damages, also called consequential damages, which include:
- transactional costs the seller incurred preparing to close the now-breached purchase agreement;
- remarketing expenses, increased closing costs, and ownership and operating costs incurred before closing a resale of the property; and
- any further drop in property value after the buyer’s breach for as long as and only when the buyer’s actions interfere and stall the seller’s resale effort; and
- interest accruing from the date of the buyer’s breach through the closing date on the resale of the property on all money and any carryback note the seller was to receive. [Calif. Civil Code §3307]
These are totaled against any offsets or credits due the buyer for:
- any rent received by the seller from tenants or the dollar amount of the implicit rent for any property used by the owner;
- the amount of any price increase on the resale; and
- the amount of any reduction in the seller’s expenses on the resale.
The objective of this accounting is to avoid placing the seller in a better financial position than had the breaching buyer fully performed.
A recessionary period experience
Consider a seller who decides to resell the property after the buyer breaches their purchase agreement. The property’s value at the time of the breach had declined below the price set in the purchase agreement, a recessionary period experience. Here, the seller incurs a loss amounting to the decline in value which is recoverable from the buyer.
However, the amount of lost market value experienced by the property which is recoverable is limited to value declines during two time periods:
- the initial decline in value below the purchase price determined on the date of the breach, recoverable as general damages; and
- any further decline in value after the breach, recoverable only when the buyer’s actions interfere with the seller’s resale effort, also called special damages, being money. [CC §3307]
The seller recovers the price-to-value loss through to the date of the buyer’s breach, whether the seller retains the property, remarkets it or resells it.
The buyer who interferes with the owner’s resale pays
A seller may diligently remarket the property and still be unable to resell it due to interference from the breaching buyer. Buyer interference with resale efforts typically consists of filing a specific performance action and recording a Notice of Lis Pendens or taking possession and refusing to vacate.
When the breaching buyer interferes with the resale, the seller recovers any decline in the property’s value after the date of breach, ending when the buyer’s interference with the resale efforts ends.
For example, a buyer sues a seller seeking specific performance of the purchase agreement. The seller claims the buyer breached the purchase agreement by failing to satisfy contingencies as scheduled.
The buyer claims the seller breached when they canceled, thus excusing the buyer from further performing. The buyer sues to recover the property and records a Notice of Lis Pendens, which clouds title and interferes with the marketability of the property.
Ultimately, the buyer is held to have breached the agreement. The lis pendens is removed from the record, called expungement, allowing the property to be sold.
A seller, whether they attempt to resell or retain the property, generally bears the risk of any fluctuation in the value of the property after the buyer breaches. The breach is the cutoff date for recovery of a decline in value, unless the buyer later interferes.
Like in this example, the risk of loss due to a decline in value after the date of breach is shifted to the buyer until the date title is cleared of the recorded lis pendens which interfered with the seller’s prompt and diligent efforts to resell the property. [Askari v. R & R Land Company (1986) 179 CA3d 1101]
Editor’s note — Stay tuned for the next episode covering value fluctuations during an evolving buyer’s market.
