When 2 parties sign a real estate contract, they generally do so with the expectation that the seller wants to sell and the buyer wants to buy. Basically, at the time that the contract is signed, both parties want to close. However, sometimes, things happen and one of the parties changes their mind and decides they don’t want to close. Now what?
There is no right or easy answer to this question. Who is attempting to terminate the contract and their reason for doing so are important factors in determining what to do. A common occurrence is when a buyer decides not to proceed at the end of the due diligence period. Most commercial real estate contracts and many residential contracts provide the buyer a time, following contract execution, to inspect the property and determine whether it is suitable for buyer’s use. Sometimes the inspection paragraph is broadly drafted and sometimes it is narrow in scope. At the end of the due diligence period, the buyer, if not satisfied, may provide notice of termination to the seller and the deposit is to be released to the buyer. Most of the time, this goes without a hitch.
But things don’t always go smoothly here, even though the provision has been negotiated and is clearly spelled out in the contract. Sellers have waited through the due diligence period patiently (or not) and want to proceed to closing and object to the termination. I had a case where my buyer client requested several extensions of the due diligence period, purportedly to complete zoning review. When the buyer ultimately terminated the contract, seller objected arguing fraud because the buyer had never made application for approval and failure to give timely notice of termination. The due diligence provision was broad and allowed the buyer to terminate for any reason. But, seller refused to consent to the release of the $50,000 deposit. When no agreement could be reached, my buyer client sued for release of the deposit. The escrow agent placed the deposit in the court registry. We prevailed at summary judgment with the court finding that the seller had voluntarily executed each amendment extending due diligence and buyer’s notice of termination was timely. Seller had to release the deposit and pay buyer’s attorney’s fees. Whether the buyer had made application for the zoning approval was not relevant.
A buyer might also attempt to terminate a contract because of a failure to satisfy other contingencies such as financing or government approvals. From the buyer’s perspective, it is important that, regardless of how the contract is drafted, the buyer document its efforts to timely satisfy the contingencies and keep the seller advised of all its efforts. If buyer does not keep the seller informed and then is unable to satisfy a contingency, seller could have grounds to object to buyer’s attempt to terminate the contract and recover the deposit. If not expressly stated, buyer has an implied covenant of good faith which means that the buyer must use its best efforts to satisfy the contingencies. If the seller isn’t in the loop, the seller can also allege that the buyer has not reasonably attempted or used best efforts to do so.
Sellers, likewise, fail to close from time to time. Buyers’ remedies are usually clearly spelled out – specific performance being the most common. To assure that a buyer can pursue specific performance as a remedy, buyer must demonstrate that it was “ready, willing and able” to close on the closing date and seller failed to perform.
This can be illustrated in another case I had a few years ago. My client was a tenant under a commercial lease. Under the lease, the client had an option to purchase after the 3rd lease year if exercised between 120 and 60 days before the end of the 3rd lease year. The terms of the purchase were set forth in the lease and the option was to be exercised in writing to landlord by tenant preparing a contract, signing the contract and sending it to landlord. Closing was to occur 60 days thereafter. We prepared the contract and timely exercised the option. The landlord’s attorney responded that the option was not valid for a myriad of reasons and if we wanted to purchase the property, the price would be 2.5 times the option price. The shake down was on.
Though we spent the next 60 days arguing with the landlord’s attorney as to why the landlord was wrong about the validity of the option, we also prepared for the inevitable lawsuit by getting ready for closing. We ordered title and survey. We prepared closing documents. The client sent me the required deposit and I notified the landlord and the attorney that the deposit was being held in my trust account. Upon receipt of the title commitment, I sent a title objection letter. We prepared a closing statement and requested seller documents. The day before the closing, the client wired the net closing proceeds to my trust account.
On the scheduled closing date, I sent the buyer signed closing documents to the landlord’s attorney and advised that all closing proceeds were in my trust account ready to be delivered to landlord/seller upon receipt of the deed and other closing documents. In effect, I “tendered” the closing proceeds. Of course, the seller/landlord rejected our tender and refused to close. We filed a lawsuit for specific performance and, because we took all of these steps, won on summary judgment. After concluding that the option was valid (rejecting all arguments of the landlord), the court cited each step we took to confirm that buyer was ready, willing and able to close and ordered landlord to convey the property to my client. Landlord was also ordered to pay all of my client’s legal fees.
Disputes over closings occur. Attention to detail on both buyer’s and seller’s side is necessary to enforce the contract or to resolve the dispute without litigation. Luckily, I have only had a handful of these cases go to court over the years. Not every deal will close. In fact, most won’t. But no one wants to litigate. Detail starts in the contract and continues as you work through due diligence and prepare to close. If the transaction is not going to close, this attention to detail will help avoid the costs of litigation.