Residential Real EstateRealty Reality: Seller"s Options When Buyer Defaults
We continue to consider the question: "What are the seller"s rights when the buyer does not close escrow on time?" First, we note that the failure of a buyer to close on time does not automatically trigger a seller"s right to cancel and, perhaps, keep the buyer"s "good faith deposit" money. Whether or not a seller will have those rights depends on the circumstances.
That is why the standard purchase contract produced by the California Association of Realtors® (CAR) says that the failure of the buyer to close escrow on time may be a breach of the contract
Certainly, if through words or deeds the seller has explicitly or implicitly let the buyer know that a timely closing was not essential, then the seller will have a need to re-establish a firm date for closing.
But suppose that"s not the case. Suppose the buyer has removed all contingencies (inspections, obtaining the loan, appraisal, etc.), and then fails to close on time. Does the seller have a right to cancel? Yes. Does he or she have the right to keep the buyer"s "good faith" or "earnest money" deposit? Again, it depends.
If the buyer and the seller have executed a liquidated damages agreement -- an optional part of the CAR contract -- then, if indeed the buyer has defaulted, the seller has a right to retain the deposit money. How much of the deposit can be kept will be subject, of course, to statutory limitations and any limits stipulated in the contract.
This seems harsh. Suppose it isn"t the buyer"s fault that the closing doesn"t occur on time? For example, it is the lender"s performance, or lack thereof, that is undoubtedly one of the most common reasons for a closing not to occur on time. Frequently, the buyer has done everything that he was supposed to do, but, for any of a myriad of reasons, the loan doesn"t get funded on time.
Unfortunately, the question of buyer default is not a question of the buyer"s intent or good-faith efforts. Even if the blame for the failure to close on time rests somewhere else, it is still the buyer"s default. Suppose that, at the last minute, one buyer (of a couple) dies. It is understandable that the remaining buyer may not want to close, but failure to close will still be a default.
Of course, saying that the seller has a right to the money doesn"t mean that he"s going to get it right away or easily. No escrow company is going to release the funds to the seller until both parties have signed instructions to that effect. And, certainly, the buyer may balk. He or she may plead some sort of mitigating circumstances, and it may take a court action to resolve the issue.
Indeed, some disingenuous buyers have been known to count on this. That is, they, or their agents, figure, "Look, the seller"s going to go along with a late closing, because they don"t want to go through the time and hassle of trying to force the release of the deposit."
And, indeed, it is true that most sellers don"t want to be faced with the trouble of having to force a release of the deposit. For that matter, most sellers don"t want to cancel just because the buyer is late. Most sellers want to sell, and, in many cases, they would prefer to close late than to put the house back on the market and have to go through the process all over again.
A seller who would prefer to close late than to begin all over still may feel that they are owed something. And usually they are right, at least in a theoretical sense. A delayed closing often costs the seller money, not to mention aggravation. Shouldn"t there be some just compensation?
Yes, but unless one is going to depend on the good will of the buyer for that (and it actually does happen sometime!) it will probably be necessary to build such a provision into the contract at the outset. This is not uncommon in the case of new homes or commercial contracts -- there may be a pre-negotiated penalty provision for late performance. In most residential resales, though, no one wants to tread on such touchy ground at the time of contract formation.
A "late performance" penalty can, of course, be negotiated late into the contract period; but at that point the only leverage the seller is likely to have is the threat to cancel. And, as noted, most sellers don"t want to cancel, even if they have a right to. It may have to depend on who blinks first.