Enforcing Purchase and Sale Agreements
Although it doesn’t happen often, when a buyer or seller unilaterally withdraws from a purchase and sale contract, it represents a material hardship to the other party. Contractual relationships generally assume two willing parties. What happens when one decides to stop performing and withdraw?
Earnest monies. Sellers are compensated for their time and effort when a purchase and sale agreement doesn’t work out by a forfeiting of the buyer’s earnest monies. The Northwest Multiple Listing Service Form 21, otherwise known as the Residential Real Estate Purchase and Sale Agreement, states in paragraph (b) that the buyer must either: (i) deliver the earnest money within two days of mutual acceptance of the agreement to the selling broker, who will deposit any check with the selling firm; or (ii) deliver any earnest money to be held by the closing agent within three days of receipt or mutual acceptance of the agreement, whichever occurs later. If the buyer fails to close, the seller can keep as earnest money an amount up to five percent of the purchase price. RCW § 64.04.005(1).
Although a fiduciary duty is owed when monies are held in safekeeping for another, you wouldn’t want to go to court to have this duty enforced. Industry best practice is to have earnest monies held by a neutral third party, usually a title and escrow company, and that a signed release by both parties be required to terminate the contract. Some real estate companies still allow the buyer’s or seller’s broker to hold earnest money prior to close of escrow. Although statutory requirements are relatively precise for how a real estate broker accounts for earnest money, it is recommended that a neutral third party hold the funds. This is the cleanest way to avoid litigation regarding earnest monies.
Specific performance. When a seller refuses to sell a contracted parcel, courts can order the seller to sell as contracted if a “specific performance” clause is included in the purchase and sale contract. “Specific performance” allows a court to order a seller to sell the property as contracted in order to make good on considerations made by the buyer. Although sellers can get up to five percent earnest monies if a buyer fails to close escrow, buyers don’t have a benefit when a seller forfeits their obligations unless the seller can be forced to sell. In most breach-of-contract cases, money damages are the only remedy available. However some courts, including Washington courts, have long held that an order of specific performance is appropriate when a seller breaches a contract to sell. As a result, buyers will want to require that the purchase and sale contract include specific performance in the event of a seller breach.
This posting is not legal advice. Legal advice is based on specific facts. This information is necessarily general in nature.
* * *