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 calculation of the seller’s recoverable transactional expenditures, operational expenses and carrying costs on the buyer’s breach.

Seller’s expenses post-breach as a natural consequence

Rather than remarket and resell the property, a seller might take the property off the market or fail in their efforts to diligently resell it after the buyer breaches. Here, the seller’s recovery of money is limited to their actual transactional expenses and any operating expenses incurred to fulfill the seller’s performance under the purchase agreement up to the time of the buyer’s breach.

Recoverable money losses the seller incurs as transactional expenditures include:

  • escrow and title charges;
  • lender charges for beneficiary statements or payoff demands;
  • lender or carryback seller charges to process the buyer’s credit clearance, mortgage application or mortgage assumption; and
  • other expenses and property reports incurred in reasonable reliance on the buyer’s full performance of the purchase agreement.

Recoverable and nonrecoverable losses

The seller may choose to retain the property or delay reselling. Here, the ownership and operating expenses the seller might incur are not recoverable.

These expenses are not incurred as a result of a buyer’s agreement to purchase or a buyer’s breach. They are incurred because the seller owns the property with no intention to immediately resell it.

However, operating losses a seller incurs when they act to comply with the terms of a purchase agreement are recoverable, including:

  • the seller’s relocation expenses to reoccupy the property when they vacated after all contingencies allowing the buyer to cancel the purchase agreement were eliminated;
  • rental income lost after the breach on units left vacant or vacated by the terms of the purchase agreement;
  • a crop revenue loss due to the planting season having passed at the time of the buyer’s breach; and
  • a price drop on the late harvest of a crop brought about due to the buyer’s breach. [Wade Lake County Title Company (1970) 6 CA3d 824]

Using net sales proceeds to buy other property

Consider a buyer who enters into a purchase agreement knowing the seller intends to acquire replacement real estate using the net proceeds from the sale. After the buyer and seller eliminate all the buyer’s contingencies and no uncertainties remain about the buyer’s full performance, the seller enters into a purchase agreement to buy replacement property. Closing of the purchase is not conditioned on the “sale of other property.”

Later, the buyer breaches, and the seller is unable to complete their purchase of the replacement property. The seller incurs expenses and losses to avoid liability for having unconditionally agreed to purchase the replacement property.

Expenses the seller incurred on the replacement property transaction are recoverable since the:

  • buyer knew when they entered into the purchase agreement that the seller intended to contract to purchase replacement property based on the buyer’s agreement to purchase; and
  • seller agreed to purchase other property relying on their buyer closing the sales escrow, since all contingencies had been removed and no obstacles to closing existed, except for the breach. [Jensen Dalton (1970) 9 CA3d 654]

Operating losses during the resale period

A seller who promptly takes steps to diligently remarket the property for sale after the buyer breaches may recover their operating expenses and carrying costs of the property incurred after the date of breach. The amount of the recovery is subject to offsets for rent the owner receives, any use of the property by the owner and like valuable benefits of ownership.

The recoverable operating expenses and carrying costs are limited to those the seller incurs during the period beginning on the buyer’s breach and ending on the earlier of the:

  • date a resale closes;
  • trial judgment on the breach; or
  • date of withdrawal of the property from the resale market.

The seller who decides to promptly resell the property and then recover any losses from the buyer has a duty to the breaching buyer to limit the operating and ownership losses, called mitigation of damages. To comply, the seller needs to take immediate steps to market the property for resale within the shortest possible time. [Spurgeon v. Drumheller (1985) 174 CA3d 659]

Calculating the losses when resold

To begin calculating the seller’s net loss during the resale period, an agent totals the seller’s costs of maintaining their ownership. However, the recoverable operating expenses and carrying costs of the property the seller incurs during the resale period are limited to operating and ownership expenses the buyer understands exist at the time they entered into the purchase agreement.

Further, the buyer is due a credit for the rental value of the seller’s occupancy, called implicit rent, and any rental income the seller receives from the property after the buyer’s breach.

For the seller to recover these ongoing losses incurred to carry the ownership of the property before resale or trial, a full accounting of income, expenses and the carrying costs of financing is provided to the buyer.

Interest on recovered losses

A seller is also entitled to interest on the losses and expenditures they recover for the decline in the property’s value, expenses of the breached transaction, resale related expenses and the carrying costs of the property during the resale effort. [CC §3307]

Unless the purchase agreement states otherwise, the interest is collectable at the legal annual rate of 10%, accruing from the date the recoverable loss or expenditure was incurred, called prejudgment interest. [CC §3289(b)]

However, when the seller retains the property rather than resells it, no property operating or value losses after the breach are recoverable and thus no interest accrues.

For the seller who diligently remarkets the property for resale, recoverable resale costs and out-of-pocket carrying costs of the property — not offset by rental income or the rental value of the seller’s use of the property — accrue interest from the date of the expenditures.

Interest recovery depends on property use

When the buyer performs and closes escrow, the seller no longer owns the property. On closing, the seller receives the net sales proceeds for their equity in the property.

When escrow does not close due to the buyer’s breach, the seller does not receive the net sales proceeds for their equity. The question of whether the seller is entitled to interest on their net equity hinges on the seller’s use of the property at the time the purchase agreement was entered into.

For example, a seller’s use of the property falls into one of two categories:

  • income-producing property used as the seller’s residence or for operating the seller’s trade or business (implicit rent), or as a rental; or
  • non-income-producing property, such as vacant land or the seller’s vacant residence.

Rents received from an income-producing property and implicit rent for the owner’s use of property are the economic equivalent of interest on the dollar value of the property. Thus, were the seller to receive interest on their equity in income-producing property or property they occupied until it resells, they enjoy a nonrecoverable windfall. It is a double recovery on their equity in the form of both interest and rent, which are economic equivalents. One or the other, but not both.

The seller who occupies the property until it is resold is charged for the value of their use of the property, called implicit rent. The amount of implicit rent is an offset against all money recoverable from the breaching buyer, including interest on the seller’s equity.

Collecting a loss on a failed sale of vacant land

For vacant unused land or the seller’s vacant residence, a buyer’s breach again fails to convert the seller’s equity into cash or cash equivalent as expected had the sale closed. Thus, until it is resold, the seller temporarily retains ownership of the equity, the price of which may be increasing, decreasing or remaining the same depending on price fluctuations in the local market.

The next question becomes whether the seller can collect interest on their equity in the property.

First, any interest due on the dollar amount of the net equity accrues from the scheduled closing date of the breached purchase agreement. On the expected closing, the seller was to receive the benefits from the sale in the form of cash for the seller’s net equity.

The accrual of interest during this period ends on the date of resale or trial. Any interest due accrues at the legal rate of 10%. However, when the breaching buyer agreed to an installment sale, the note rate for the carryback paper is the controlling rate.

Next, when the breached purchase agreement contains a provision limiting the dollar amount of loss the seller may collect, the agreed-to limit controls the limit of recoverable loss — except for the accrual of interest, an additional amount.

In conclusion, when the buyer breaches an agreement to purchase vacant or non-income producing property, interest is due on the net sales proceeds the seller was to receive on the sale, from the date scheduled for closing until the property is resold.