Can I Simply Back Out of the Deal?

In August, in a Wall Street Journal article, the real estate brokerage firm, Redfin, was quoted as saying that in July, 16% of  pending home purchase agreements fell through because sellers wouldn’t renegotiate the prices. Given the rising mortgage rates and inflation in general, this comes as no surprise. What could be a surprise is that the buyer, if the agreement meets the requirements of a contract, could wind up a defendant in a civil lawsuit. In New York, in order for a contract  for the sale and purchase of real estate to be enforceable, the contract must be in writing and signed by both parties. (NY State Statute of Frauds). The contract also binds the seller and buyer to meet its obligations under the terms of the contract.

For expertise on this subject, I spoke with Nica B. Strunk, an attorney located in Southampton, N.Y. who specializes in litigation.

JAV: Explain the difference between a transaction lawyer and a litigator.

NBS: Transactional attorneys represent the buyers and sellers in a deal. They prepare and negotiate the contract and perform the closing. Litigators handle disputes that go to court. If there is a need for a buyer or seller to file for breach of contract in the Supreme Court in the county where the property is located, then a litigator is typically retained to commence that action.

JAV: What are some of the reasons that one of the parties may want to back out of a contract?

NBS: One reason might be that the seller wants a higher price, especially in a market like we have seen over the past several years. If the seller backs out of the deal, the seller could be held in breach of contract. If the buyer backs out because he finds a house for less money, for example, then the buyer could be held in breach of contract.   

JAV: In the event that the buyer backs out, what are the possible consequences for breach of contract?

NBS: It very much depends upon what the contract says. One possibility would be the loss of the buyer’s deposit, usually 10% of the purchase price that the seller’s attorney is holding in escrow. That can constitute liquidated damages, which the seller would retain and then have no further recourse against the buyer. It is also possible that a court could determine that a different amount, (which could be higher or lower than the contract deposit), was appropriate to compensate for the seller or buyer’s breach. That would be a matter of common law, not statutory law, and it would depend on the facts of the case.

JAV: Explain specific performance.

NBS: Specific performance is when the court requires the seller to complete the sale of the property consistent with the terms of the contract. That is because the property is considered unique and irreplaceable and the buyer cannot be expected to accept a substitute. Generally, it is only the buyer who can get a judgment of specific performance if they prevail in a lawsuit. A seller who prevails in a lawsuit would get an award of money damages.

JAV: Tell us about the statute of limitations in New York with respect to commencing a lawsuit for breach of contract.

NBS: In New York, the plaintiff, the party bringing about the lawsuit against the other party, the defendant, has six years to file a lawsuit in the county where the property is located. However, if equitable relief, such as specific performance is sought, then the plaintiff cannot unduly delay the filing of a suit. The equitable law of laches requires the injured party to act expeditiously.

JAV: If the transaction attorney for the buyer suspects that the seller is going to breach the contract, what steps should the buyer’s attorney take?

NBS: If there is a genuine and verifiable risk that the seller is going to sell the property to someone else, then the buyer’s attorney should immediately commence an action for specific performance and file a notice of pendency in the county clerk’s office where the property is located. The notice of pendency gives constructive notice to the public of the litigation on a buyer’s contract claim against the property.

JAV: Explain the terms, constructive notice and actual notice.

NBS: Constructive notice means that because the notice of pendency is publicly filed and a prudent buyer will do a title search before purchasing, a second buyer cannot claim lack of knowledge of the first buyer’s claim. Sometimes the second buyer has actual knowledge of the first buyer’s claim, if, for example, a broker or the seller themselves discloses it. But if a notice of pendency is not filed expeditiously and the seller does sell it to a second buyer who does not have actual or constructive knowledge of the first buyer’s contract, the first buyer could lose the property forever.

JAV: May decisions of the Supreme Court be appealed to an Appellate Division?

NBS: Yes, they may, and the Appellate Division Court will hear the case. A request may be made to appeal the decision of the Appellate Division to New York’s highest Court, the Court of Appeals, but that Court is not required to hear the appeal. Like the U.S. Supreme Court, it selects a limited number of cases to hear each year

JAV: To coin a phrase, the wheels of justice turn slowly, and it often takes years before a final decision is reached.  In those cases, explain the time frame for the award of damages to the plaintiff.

NBS: An award of money damages generally includes 9% New York State statutory interest from the date that the court determines that a breach occurred until the date the judgment is filed in the clerk’s office. However, it has been held that, in certain cases where the contract provides for the seller’s retention of the contract deposit as liquidated damages, prejudgment interest cannot be added to that amount. Post judgment interest of 9% applies from the date the judgment is entered to the date it is satisfied (i.e., paid). The time and attorney’s fees involved in litigation often incentivize the parties to arrive at a settlement, which the courts favor and sometimes try to facilitate.