BREAKING UP IS HARD TO DO – WHEN THE BUYER’S BREACH RESULTS IN LOSS OF THE EARNEST MONEY DEPOSIT (OR MUCH MORE)

Few buyers enter into a real estate contract expecting that they will be unable to close on the purchase.  Sometimes, however, bad or unexpected things happen, the closing does not occur as planned and an upset seller will make a claim for the buyer’s earnest money deposit. 

Although most buyers believe that their monetary exposure in the event they breach the contract and fail to close on their purchase is limited to the amount of their earnest money deposit, this is not the case.  The GCAAR Regional Sales Contract provides that the seller may, at its option, accept the earnest money deposit as full and “liquidated damages” for the breach.  If this election is made, the seller will accept the deposit as full payment for its damages and the buyer will have no further liability to the seller.  However, a seller is not required to accept the deposit as liquidated damages and may pursue the buyer for all its damages, an amount that could substantially exceed the amount of the deposit.  For example, if an earnest money deposit was $5,000 and the seller incurred $10,000 in damages as a result of the buyer's  breach, the buyer could be liable for the whole $10,000, plus the seller’s attorneys’ fees (and his or her own attorney’s fees, as well).

A prudent buyer should consider amending the default provision of the real estate contract to provide that, in the event of a breach, the seller shall accept the earnest money deposit as its liquidated damages without exception.  Such an amendment would establish with certainty the maximum liability the buyer would face if he or she breached the contract and failed to close.  Otherwise, potential damages are unknown at the time of the contract and a buyer could face significant liability in the event of a breach.

If you have any questions regarding real estate contract issues, please feel free to contact me at (301) 444-4664 or via e-mail at bruce@sternlegal.net.

Bruce L. Stern, Esq.

Don't Skip the Survey

Many clients will ask their real estate agent if they need to obtain a survey in connection with their purchase of real property.  If the survey is not required by the purchaser's lender, or if the transaction is a cash deal, some realtors will tell their clients that they do not need a survey and to save the expense.  (Location surveys typically cost between $200.00 and $225.00 for a single family home on a lot less than an acre is size.)  This is a big mistake and, as a lawyer, I strongly recommend that all buyers obtain a location survey of the property they are purchasing - regardless of whether a survey is required by the lender - so that the buyer is aware of any title issues that may be disclosed by the survey.

The survey - which is essentially a map of the property and shows, among other things, where the house, buildings and fences are constructed with respect to the property line - can alert a buyer to potential problems regarding the property under contract that would not otherwise be disclosed by a title search.  For example, my office did a closing last year where the survey showed that the driveway for the property was actually constructed over the next door neighbor's land.  No easement providing the property owner with access over the neighbor's land had ever been recorded and the property being purchased was essentially landlocked.  This fact would never had been discovered had a survey not been ordered by the buyer.  Similarly, we recently conducted a closing on a property where the buyers thought they were getting a large, fenced in backyard.  The survey, however, revealed that the fenced in yard actually contained a large portion of land that belonged to the next door neighbor.  Again, this would have gone undetected if no survey had been ordered. 

Buyers who fail to purchase a survey are also not protected by title insurance which has a specific exception to coverage for issues that would have been disclosed by an accurate survey of the property.

The lesson of this blog post is simple.  When your clients are spending several hundreds of thousands of dollars (or more) purchasing a house, they should not spare the nominal $200.00 expense of a survey.

If you have any questions regarding a real estate matter, feel free to call me at (301) 444-4664 or send me an e-mail at bruce@sternlegal.net.