Refusal to Close on a Commercial Real Estate Contract
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UPDATED: Sep 19, 2013
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The buyer and seller each agreed to perform specific obligations to complete the deal, and now one of the parties pulls out of the contract. A typical commercial real estate contract contains a provision on available remedies if one of the parties defaults and refuses to close on the agreement. Often the real estate contract has a clause for keeping a buyer’s “earnest money” (essentially a buyer’s deposit, often around 1% of the total purchase price) if the buyer defaults.
Seller’s Refusal to Close
If the real estate contract is silent as to what happens if the seller defaults, then the buyer can usually go to court and sue for specific performance. The order, if granted by the court, commands the seller, under penalty of being held in contempt of court, to transfer the property to the buyer upon payment of the agreed purchase price. This is based on the legal assumption that each piece of real estate is unique and that money alone cannot adequately compensate the buyer for loss of the desired property. Alternatively, the buyer can sue for money damages that represent the difference between the contract price and the fair market value of the property. This kind of lawsuit assumes that the fair market value of the property is higher than the contract price. The buyer may also be able to recover consequential damages such as mortgage application fees, appraisal fees paid in reliance of the contract, and other such fees.
Buyer’s Refusal to Close
When the buyer refuses to close, the seller can sue for money damages. However, the buyer who backed out often does not have a preapproval to start with, but just a prequalification. So, the seller may not be able to collect any lost profits from the default. It is a good idea to initially get a preapproval rather than a prequalification to reduce the chance the buyer does not have the financial resources. Additionally, in the letter of intent and/or the contract itself, not mentioning third party financing contingencies can help reduce the possibility that the buyer can be denied financing and then cancel the contract without penalty. However, it is rare to have such a contingency-free contract. If such contingencies are part of the commercial real estate contract, the seller may collect lost profit, but rarely the entire purchase price. The court will not typically order the buyer to complete the sale by paying the entire amount previously agreed to in the contract.
Seeking Legal Advice After the Other Party Defaults
A commercial real estate attorney or the lawyer you previously hired to help draft or review your commercial real estate contract and possible letter of intent can advise you on your available remedies and chances of collection, after the other party refuses to finalize the deal.