Refusal to Close on a Commercial Real Estate Contract

UPDATED: Jul 17, 2023Fact Checked

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Steve Crowell is a New Hampshire based mortgage loan originator with Luminate Home Loans, Inc. After graduating from the University of New Hampshire in 2003 with a BS in Business and Economics and a BA in History, he went on to get his broker license in 2005. In 2021, he was recognized as a Luminate Home Loans “Circle of Excellence” top agent. Steve works as a trusted resource for clients w...

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UPDATED: Jul 17, 2023

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UPDATED: Jul 17, 2023Fact Checked

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.

Case Studies: Strategies and Resolutions for a Refusal to Close on a Commercial Real Estate Contract

Case Study 1: The Unforeseen Environmental Concerns

A commercial real estate transaction was underway for the purchase of a warehouse. The buyer and seller had agreed upon the terms of the contract and were approaching the closing date.

The buyer notified the seller of the environmental issues and requested a reduction in the purchase price to compensate for the cleanup costs. The seller initially refused, arguing that the contract did not explicitly address environmental conditions. However, after negotiations and the involvement of legal counsel, the parties reached a resolution. They agreed to amend the contract, reducing the purchase price to account for the cost of remediation, and the transaction proceeded to closing.

Case Study 2: Financing Fiasco

A commercial real estate transaction was in progress for the sale of a retail space. The buyer and seller had executed the purchase agreement and were in the process of obtaining financing.

The buyer informed the seller about the financing setback and requested an extension to secure alternative financing. The seller, eager to close the deal, initially refused the extension and threatened to pursue legal action for breach of contract. However, after further negotiations and consideration of the market conditions, the seller agreed to grant a limited extension to allow the buyer to secure alternative financing. Eventually, the buyer secured financing from another lender, and the transaction successfully closed.

Case Study 3: Dispute Over Property Condition

A commercial real estate transaction was underway for the sale of a restaurant building. The buyer and seller had executed the contract, and the closing date was approaching.

The buyer raised their concerns with the seller and requested repairs or a price adjustment to address the property’s condition. The seller denied any knowledge of the defects and refused to take responsibility. The parties entered into a dispute, which required intervention from their respective legal counsels. After conducting further investigations and inspections, it was determined that the seller had indeed misrepresented the property’s condition. As a result, the parties reached a settlement agreement where the seller agreed to perform the necessary repairs before closing, or alternatively, provide a reduction in the purchase price to compensate for the cost of repairs. The transaction proceeded to closing after the agreed-upon resolution was implemented.

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Jeffrey Johnson

Insurance Lawyer

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Insurance Lawyer

Steve Crowell

Mortgage Loan Originator

Steve Crowell is a New Hampshire based mortgage loan originator with Luminate Home Loans, Inc. After graduating from the University of New Hampshire in 2003 with a BS in Business and Economics and a BA in History, he went on to get his broker license in 2005. In 2021, he was recognized as a Luminate Home Loans “Circle of Excellence” top agent. Steve works as a trusted resource for clients w...

Mortgage Loan Originator

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