This article discusses buyer remedies when a seller breaches or cancels a purchase agreement.
The seller fails to act timely
On occasion, a buyer’s agent in a real estate sales transaction will be confronted with conduct by the seller which interferes with the close of escrow.
Examples of seller interference with a buyer’s acquisition of property include the seller’s failure to (timely):
- return escrow instructions;
- deliver closing documents;
- provide escrow with information on existing mortgages for requesting payoff demands, beneficiary statements or assumption papers;
- deliver seller identification information for title insurance purposes;
- eliminate defects as agreed to — or eliminate previously undisclosed property defects discovered after contracting to buy and found unacceptable to the buyer;
- arrange or permit property inspections by the buyer, appraiser, home inspector, city inspector, etc.; or
- close escrow as scheduled.
At the time of the seller’s interference, the buyer either has fully performed or is unable to proceed further toward closing. Thus, escrow cannot close due to an unexcused failure by the seller to perform an activity or cause an event to occur.
Seller remorse
Typically, the seller’s refusal or failure to timely act under the purchase agreement and close escrow arises during a recovery period characterized by dramatic increases in pricing for the type of property the seller has agreed to sell to the buyer.
In contrast, when property prices are falling (as began here in California in 2022), it is buyers who are more likely to back out of a purchase agreement in search of a better deal elsewhere.
Other reasons a seller may back out of a purchase agreement include:
- an inability to find or borrow mortgage funds to purchase a suitable replacement home, such as during times of low MLS inventory and fast rising property prices and mortgage rates;
- an unwillingness (or inability) to pay for or implement repairs demanded by the buyer following an untimely home inspection which reveals defects and needed repairs;
- the discovery during the title search of outstanding liens against the home; and
- a change in life circumstances which no longer requires the seller to move, such as a job loss.
Occasionally “seller remorse” sets in, manifested by the seller’s efforts to force the buyer to default on a scheduled activity or event which justifies the seller’s termination of the purchase agreement.
Faced with the failure of escrow to close due to the seller’s nonperformance or obstruction of the buyer’s efforts to proceed and close escrow — and the inability of the buyer and agents to induce the seller to voluntarily close escrow — the buyer is forced to make a pivotal decision regarding their bargained-for ownership of the property.
Buyer remedies
When the seller breaches the purchase agreement or escrow instructions, the decisions available to the buyer, called remedies, include:
- abandoning the transaction by entering into a mutual cancellation of the purchase agreement and escrow instructions with the seller, agreeing to do nothing further to enforce the right to purchase the property or seek a money recovery from the seller, other than a return of the buyer’s good faith deposit; [See RPI Form 181]
- acquiring the property by pursuing a specific performance action — enforcement — of the purchase agreement and escrow instructions;
- pursuing the recovery of money when the buyer cannot now acquire the property but due to the seller’s conveyance of the property for a measurably higher price to another person who was unaware of the pre-existing purchase rights held by the buyer; or
- pursuing the recovery of money when the buyer no longer wants to acquire the property, and the value of the property was measurably higher on the date the seller canceled escrow than the price the buyer agreed to pay — in this case, the losses are equal to the difference between the price the buyer contracted to pay and the value of the property at the time of the seller’s breach.
An unsuspecting buyer who acquires ownership of real estate without actual knowledge or recorded notice (constructive knowledge) of a pre-existing enforceable purchase agreement held by another buyer regarding the same property is referred to as a bona fide purchaser (BFP). As a BFP, the buyer pays consideration to acquire and take title to the property while having no knowledge of a claim to the property held by the other buyer. [Calif. Civil Code §3395]
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Misplaced reliance on an adverse party
Consider an owner of commercial real estate who lives out of the area. The absentee owner is solicited by a buyer’s agent seeking to locate properties suitable for their buyer. The owner responds indicating they will sell the property, but do not know its value. They ask for an indication of its value from the buyer’s agent.
The owner is capable of understanding that the buyer and the buyer’s agent are their adversaries in negotiations.
After exchanging information about the property, the buyer’s agent states they do not want to express an opinion of value on someone else’s property, but have shown their buyer similar properties offered at $2,000,000. The owner does not indicate what they believe the value of their property might be, but acknowledge they know the market value of nonresidential property is on the rise.
The buyer’s agent prepares a purchase agreement offer for a cash price of $2,500,000. The buyer signs the offer and it is submitted to the owner.
The owner accepts the offer and the buyer’s agent promptly dictates escrow instructions. A copy of the instructions and a grant deed for the transfer are sent to the seller. The buyer signs and returns the documents to escrow. On receiving, reviewing and approving the preliminary title report, the buyer advises escrow they will place the balance of the cash price into escrow when escrow calls for funds.
Seller’s discovery of property
The owner then visits the community where their property is located. For the first time, the owner inquires into the worth of their property by contacting local agents. The owner finds the property is worth considerably more than the price they agreed to.
Another buyer is located and a price of $7,500,000 is agreed to. Escrow is opened with the new buyer at a different escrow and title company and closed immediately.
Meanwhile, the original buyer is involved in a futile attempt to close their escrow with the owner. The owner claims the agreement they entered into with the buyer was never a binding contract due to the buyer’s misrepresentation of the property’s value and the owner’s reliance on the agent’s evaluation to set the sales price. Thus, they have no deal.
The original buyer decides they no longer want the property and will not pursue acquiring it since the new buyer is likely a BFP.
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The original buyer makes a demand on the owner for $5,000,000, the difference between the price agreed to and its worth on the owner’s breach based on the price the seller received on the resale of the property.
The owner refuses to pay the demand, claiming their refusal to close escrow at the agreed price was justified since the property’s value was known to the buyer and the buyer’s agent, but not to the owner. Thus, they took advantage of the owner’s ignorance of the property’s true value, called misrepresentation.
Here, the owner was a knowledgeable individual, fully aware of their choice to not inquire about the value of the property before agreeing to sell it to the original buyer at the price of $2.5 million. Thus, the owner owes the buyer the difference between the price agreed to with the buyer and the value of the property on the date the seller breached ($5,000,000). [Kahn v. Lischner (1954) 128 CA2d 480]
Recover money, not property
A buyer who seeks to recover money from a breaching seller, in lieu of ownership of the property, does so based on monetary claims within three categories of money losses:
- general damages, being money directly expended in the transaction or the monetary value lost in the transaction;
- special damages, also called consequential damages, being money collaterally lost due to the seller’s breach; and
- prejudgment interest on all monies recovered. [CC §3306]
General damages are monetary losses incurred by the buyer due to their expenditures and loss of value — greater market value at the time of seller breach. These money losses directly relate to their acquisition of the property which, due to the seller’s breach, they are no longer going to acquire, including:
- money advanced by the buyer toward the price of the property, such as deposits held by the agent or escrow, or previously released to the seller;
- expenses incurred examining title conditions, inspecting the property, verifying operating income and expenses, and obtaining financing, escrow services, engineering and improvement plans, etc., all called transactional expenses;
- move-in expenses incurred preparing the property to take possession; and
- the price-to-value difference between the price agreed to in the breached purchase agreement and the value of the property on the date of the seller’s breach.
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Price-to-value difference on date of breach
Consider a buyer of real estate who enters into a purchase agreement to acquire one of two adjacent lots held by the owner. The purchase agreement contains a provision granting the buyer a right of first refusal to acquire the adjacent lot, also called a preemptive right to buy.
The right-of-first-refusal provision sets the price of the adjacent lot at $900,000, but does not state an expiration date for the right to buy it. A more formal documentation of the right of first refusal is not entered into and no memorandum of the right is recorded. The transaction closes.
Many years later, the owner conveys the adjacent lot to another person for $2,000,000. The person who acquires the adjacent lot has no knowledge of the outstanding right of first refusal. Thus, the person who acquired the adjacent lot is a BFP, barring any recovery of the lot by the buyer.
The buyer claims the owner has breached the right-of-first-refusal provision in their purchase agreement. Thus, the buyer makes a demand for the monetary value of the lost right to buy since they may no longer acquire the adjacent lot.
A right of first refusal is a contractual pre-emptive right held by another person to buy a property if the owner later decides to sell it.
The buyer’s demand on the owner is $1,100,000, the difference between the price set in the right of first refusal provision and the value of the property on the date of the breach. The demand also includes interest at 10% (the legal rate) on the amount from the date of the breach until the demand is paid.
The owner refuses to pay the demand, claiming the right of first refusal they granted at the time of the purchase of the first lot expired prior to the owner’s sale of the lot since the provision did not contain an expiration date, and a reasonable period of time for the right to continue had passed.
Can the buyer recover money equal to the price-to-value difference several years later at the time of the sale of the lot covered by the right of first refusal?
Yes! The right of first refusal which the owner granted did not state a date for its expiration. Thus, the date of expiration becomes the date of the death of the owner who granted the right.
Editor’s note: A buyer who recovers money losses is also entitled to recover interest at the (legal) rate of 10%, commencing on the date of the seller’s breach, on amounts recovered for:
- the price-to-value difference;
- money paid toward the purchase price, whether held by the seller or as a deposit in escrow, until the date released to the buyer;
- funds expended on title examination and other transaction expenses incurred preparing to take title;
- expenses incurred while preparing to take possession of the property; and
- interest on consequential losses accruing from the date of their disbursement. [Al-Husry Nilsen Farms Mini-Market, Inc. (1994) 25 CA4th 641]
The notice of intent to sell
The period following the notice of the owner’s intent to sell controls the buyer’s actions. Until notice of intent, the buyer does nothing but wait to see if the owner ever decides to sell. The owner’s delivery of the notice to sell starts the running of the period during which the buyer may exercise their right to buy.
When this period for exercise is not stated in the right-of-first-refusal provision, it is limited to a reasonable period of time for acceptance/exercise which begins to run when the buyer receives notice from the owner of their decision to sell. [See RPI Form 162-2]
What expires is the period after the notice, not the grant of the preemptive right to buy, unless the right-of-first-refusal provision specifically limits the term of the grant.
Accordingly, the buyer’s money recovery of the lost opportunity to buy a property is the difference between:
- the value of the property on the date of the breach, here set by the price the owner received for the property on the resale (the event which triggered the right to buy); less
- the price agreed to in the right of first refusal provision as the amount the buyer was to pay for the property on exercise of the right to buy. [Mercer Lemmens (1964) 230 CA2d 167]
Preparing to take possession
Consider a buyer who enters into a purchase agreement with an owner-builder to construct a new home. The buyer purchases appliances and upgrades the fixtures, which the builder installs.
Later, the builder substantially alters the construction plans without the buyer’s approval. The buyer demands the builder complete construction under the plans and specifications as agreed. The builder refuses since they have prospective buyers for the property at a significantly higher price.
The buyer decides they no longer want the new home due to their conflict with the builder. Thus, they unilaterally cancel the purchase agreement since the builder has breached the agreement. The buyer now seeks to recover money — not the property — from the builder.
Here, the amount of money losses the buyer may recover from the builder include:
- funds advanced toward the purchase price, including good faith deposits and monies released to the seller;
- the price-to-value difference between the price the buyer agreed to pay in the purchase agreement and the resale value of the property at the time of the builder’s breach;
- expenses incurred to prepare the property for possession (to the extent they exceed the price-to-value difference), i.e., the expenditures made by the buyer for the additional appliances and upgraded fixtures; and
- interest from the date of the breach on all amounts of money recovered.
The buyer may recover expenditures incurred prior to a seller breach to prepare a property so they can take possession. However, the purchase agreement by its provisions needs to reflect the intention of the buyer to incur these expenditures. Recovery of construction costs advanced by a buyer for upgrades and additions gives the buyer the benefit of the bargain contemplated by both the buyer and seller when they entered into their agreement.
However, the buyer cannot enjoy a double recovery for the upgrades they paid for when the price-to-value increase exceeds the cost of the upgrades.
For instance, any expenditure a buyer may make to purchase furnishings before taking title to a new home is excluded from recovery. Here, money spent on furnishings is not related to the acquisition of real estate. Accordingly, it is prudent for a buyer to wait until escrow closes before actually buying furnishings for their use when in possession of the property.
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Special damages, a natural result
A buyer whose seller has breached their purchase agreement is also entitled to recover related expenses incurred by the buyer after the breach. These post-breach expenditures only qualify for recovery when they are the natural result of the seller’s breach, called special damages.
For the buyer to recover post-breach expenditures, the seller on entry into the agreement needs to know or be on notice the expenses will likely be incurred by the buyer as a natural and unavoidable result of the seller’s breach of the purchase agreement.
Consider a buyer who enters into an agreement to purchase a lot from a builder since the buyer needs a building to house their business. The builder agrees to complete the construction of improvements on the lot and convey the property by an agreed-to date.
Before the builder enters into the purchase agreement to sell and construct improvements on the property, the builder is informed of the adverse tax consequences the buyer will be subjected to when the construction is not completed and the property conveyed by the date scheduled for closing. Thus, time for performance by completion of construction and close of escrow is known by the builder on entering into the agreement as necessary for the buyer to qualify to avoid profit taxes on a prior sale of other property.
Recoverable special damages
The builder fails to complete construction and convey the property prior to the date set for closing. Here, due to the builder’s breach, the buyer is unable to avoid incurring and paying income taxes on the profit taken on their prior sale of their trade or business property (or investment property). The buyer is also forced to rent another property (and incur moving expenses) until the construction the builder promised is completed.
Here, the special damages recoverable by the buyer in the form of a money award include:
- the full amount of the profit tax the buyer paid;
- the rent paid for the temporary facilities until the improvements were completed (plus the cost of additional moving expenses); and
- interest at 10% from the date the amounts of rent and profit tax were paid by the buyer. [Walker Signal Companies, Inc. (1978) 84 CA3d 982]
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Losses you cannot recover
A buyer’s expenses and losses which are too remote and speculative to be foreseen by the seller as their obligation on their breach when agreeing to sell on the terms stated in the purchase agreement are not recoverable from the seller.
For example, a buyer enters into a purchase agreement to acquire an unimproved parcel of commercial property. The seller knows the buyer plans to develop the property. Before escrow closes, the seller determines a higher price can be had for the property from other prospective buyers and cancels escrow.
Here, the buyer can recover any increase in the value of the land on the date of breach over the agreed-to purchase price, as may be reflected by the seller’s resale of the property.
However, the buyer is not entitled to recover profits they might earn had they acquired the land and developed it. Lost profits from the anticipated development of the property the buyer does not acquire are unrelated to the sale. Worse, future operating profits are too speculative to be recovered by a buyer. [Stewart Development Co. v. Superior Court for County of Orange (1980) 108 CA3d 266]
This logic also applies to lost income from rents a buyer might receive when they acquired property subject to a long-term lease are not recoverable. The recovery of rents is barred on a different legal theory from consequential losses. Rents are related to the value of the property as it exists at the time of purchase, a capitalization issue.
Rent produced by income property is a factor used to establish the property’s present value — the price to be paid for the property. Allowing the buyer who does not buy the property to receive a money award for both the increase in the resale value and future rents from a breaching seller is a double recovery, i.e., present value of the future flow of rent, plus those future rents.
Further, interest serves the same economic function as rents. Both are a return on capital. Thus, when a buyer receives interest on the amount of their recovery, the further receipt of future rent is an impermissible double recovery. [Stevens Group Fund IV v. Sobrato Development Co. (1992) 1 CA4th 886]
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