Section 25 of the OREF Residential Sale Agreement sets forth Seller and Buyer remedies for breach. They are materially different.
- If the Buyer refuses to close without a legal reason, the Seller’s sole remedy is to retain the earnest money deposit. This means that if the Seller, in reliance on the belief that the Buyer will be closing on a certain day, makes arrangement to move, and perhaps even purchases another home, incurs financial damages, he or she can only recover the Buyer’s deposit. If that amount is less than the Seller’s actual damages – too bad. Is this fair?
While some might say it is unfair, we must remember that the seller can control of the amount of earnest money he or she wants to hold as a deposit. If a Seller plans to expend funds in anticipation of a successful closing, then that should be factored into the size of the deposit to demand. Listing brokers should keep this in mind. Of course, the marketplace will also have something to say about whether the Seller has the bargaining power to demand a large deposit. In a Seller’s market, like today, you can expect deposits to be markedly higher than during the Great Recession, when it was a Buyer’s market and deposits were lower.
- If the Seller refuses to close without a legal reason, he or she will have to refund the Buyer’s deposit. But things don’t stop there. Acceptance of the deposit does not prevent the Buyer from seeking the remedy of specific performance, i.e. requiring the Seller to close the transaction upon the terms originally set forth in the Sale Agreement. And if a Buyer incurs additional damages due to their Seller’s refusal to close [e.g. loss of the loan lock, and a higher rate of interest], the Seller can be held liable for that, too. Is this fair? While some might say the Seller should have a similar remedy if the Buyer refuses to close, the reality is that: (a) The Seller had the ability to protect him/herself by demanding a larger deposit; and (b) Requiring specific performance of a Buyer is effectively impossible, since it would mean – in most cases – “making” the Buyer apply and qualify for a loan he or she doesn’t want to take out.
For the past several years, Buyer specific performance cases were few and far between. The reason was obvious with short sales – Sellers always wanted to sell, so long as they were satisfied with the terms of their lender’s consent. The OREF Short Sale Addendum included terms saying that the transaction was subject to the lender’s consent, so long as the Seller approved of those terms. If the Seller rejected the terms of the lender’s consent, there wasn’t much a Buyer could do. And since short sale Sellers were not angling for a higher price [i.e. they didn’t care about price – as long as the lender was agreeable with it], they almost always agreed to sell, so long as the lender let them off the hook for the remaining loan balance.
And in those cases in which the Seller actually had equity to recover at closing, most Sellers never backed out of their sale, since: (a) It was a “Buyer’s market” [i.e. there were far fewer qualified Buyers, than ready, willing and able Sellers]; and (b) Market prices were falling, which meant that a Seller’s refusal to close only resulted in further delay, and delay translated into a lower selling price the next time around.
Today, the shoe is on the other foot. It is a “Seller’s market” [i.e. there are far fewer Sellers, than ready, willing and able Buyers]. Now, as market prices are increasing, we are seeing cases in which some Sellers are trying to get out of their transactions, hoping to put their property back on the market for a higher price.
However, this decision can be risky to Sellers for the following reasons:
- ORS 93.740 permits a plaintiff who has filed a specific performance claim in court, to file a Lis Pendens in the public records of the county where the property is located, and the OREF Sale Agreement provides that the filing of a specific performance claim in arbitration [which is the contractually required forum for dispute resolution] will permit the buyer to file a Lis Pendens under the statute.[1] Roughly translated, the Lis Pendens gives public notice that “litigation is pending” on the subject property. In other words, title to that property becomes “clouded;” it is no longer marketable. The Seller is unable to transfer title or refinance their home loan, or generally do anything else to legally undermine their Buyer’s claim to the property. Everything is held in abeyance until the Buyer’s claim is concluded. If a Seller did sell or transfer their interest in the property while encumbered by a Lis Pendens, it would be inferior to the Buyer’s specific performance claim.
- If the Seller’s refusal to close results in the Buyer losing their loan lock, and a new loan would be at a higher interest rate, there would be a cost to “buy down” that rate to the level it was originally locked at. For example, the cost to buy down the rate one percentage point, would be 1.00% X the amount of the loan. This cost could be recovered against the Seller. Similarly, if the Seller’s refusal to close caused the Buyer to have to store their furniture, etc., that cost could also be recovered.
- Lastly, if the Buyer prevails in the arbitration, in addition to paying their own attorney, the Seller may have to pay for the Buyer’s costs and attorney fees.
Conclusion. The “take-away” here is that with prices rising today, and Sellers dealing with multiple offers, there is a feeding frenzy going on in the marketplace. With a scarcity of housing inventory, Buyers may be more willing to fight, since they can’t know if they will be able to replace their Seller’s property with a suitable substitute at the same price. And with the likelihood of the Federal Reserve increasing rates mid-year, there is even more reason for a Buyer to insist that their Seller specifically perform the terms of the Sale Agreement, and, if necessary, pay the cost to buy down their loan to its original rate. All in all, specific performance, where appropriate, can be a powerful tool in cases of “Seller’s Remorse.” ~PCQ
[1] The Sale Agreement also provides that the filing for arbitration will “toll”, i.e. stop, the applicable statute of limitations, just as if the matter had been filed in a court of law.
