Real estate contracts - Remedies for breach

Learning Outcomes

After reading this article, you will be able to identify and apply the main remedies available for breach of real estate contracts. You will understand the rules for expectation damages, specific performance, liquidated damages, and the circumstances in which each remedy is available to buyers and sellers. You will also be able to answer MBE-style questions on these remedies with confidence.

MBE Syllabus

For the MBE, you are required to understand the remedies available when a real estate contract is breached. This includes knowing the types of damages, when specific performance is appropriate, and the effect of liquidated damages clauses. You should be able to:

  • Recognize the types of damages recoverable for breach of a real estate contract.
  • Determine when specific performance is available to buyers and sellers.
  • Analyze the enforceability of liquidated damages clauses.
  • Distinguish between remedies available to buyers and sellers.
  • Apply the rules to fact patterns involving breach and remedies.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. A buyer breaches a contract to purchase land. The seller resells the land at a lower price. What is the seller’s usual measure of damages?
    1. The full contract price.
    2. The difference between the contract price and the resale price.
    3. The buyer’s deposit.
    4. The cost of improvements made by the seller.
  2. Which remedy is most likely to be granted to a buyer when a seller refuses to convey unique real property?
    1. Money damages only.
    2. Rescission.
    3. Specific performance.
    4. Punitive damages.
  3. A real estate contract contains a liquidated damages clause allowing the seller to retain the buyer’s deposit if the buyer breaches. Under what condition is this clause most likely enforceable?
    1. The deposit is nominal.
    2. The amount is reasonable and not a penalty.
    3. The seller suffers no loss.
    4. The buyer acted in good faith.

Introduction

When a real estate contract is breached, the non-breaching party may seek various remedies. The law recognizes that land is often unique, so remedies can include both damages and equitable relief. The choice of remedy depends on the nature of the breach, the terms of the contract, and the conduct of the parties.

Key Term: Breach of Contract The failure of a party to perform a contractual obligation when performance is due.

Types of Remedies for Breach

Remedies for breach of a real estate contract fall into two main categories: legal (damages) and equitable (specific performance). The contract may also provide for liquidated damages.

Damages

The standard measure of damages is expectation damages—putting the non-breaching party in the position they would have been in had the contract been performed.

Key Term: Expectation Damages Damages awarded to place the injured party in the position they would have occupied if the contract had been fully performed.

  • Seller’s Damages: If the buyer breaches, the seller is entitled to the difference between the contract price and the fair market value (or resale price) at the time of breach, plus incidental damages (such as expenses for resale).
  • Buyer’s Damages: If the seller breaches, the buyer is entitled to the difference between the market value at the time of breach and the contract price, plus any expenses incurred in reliance on the contract.

Specific Performance

Because land is considered unique, courts will usually grant specific performance to buyers when the seller breaches, requiring the seller to convey the property as agreed.

Key Term: Specific Performance An equitable remedy ordering a party to perform their contractual obligation, typically granted when damages are inadequate.

  • Buyer’s Right: A buyer can almost always obtain specific performance if the seller refuses to convey title, unless the property has already been sold to a bona fide purchaser.
  • Seller’s Right: A seller may obtain specific performance to compel the buyer to pay and complete the purchase, but this is less common since damages are usually adequate.

Liquidated Damages

Contracts often include a liquidated damages clause, commonly allowing the seller to retain the buyer’s deposit if the buyer breaches.

Key Term: Liquidated Damages A sum agreed upon in the contract as the amount to be paid if a party breaches, enforceable if reasonable and not a penalty.

  • The clause is enforceable if the amount is a reasonable estimate of probable loss at the time of contracting and not intended as a penalty.
  • If the amount is excessive, courts may refuse to enforce the clause and limit the seller to actual damages.

Worked Example 1.1

A buyer contracts to purchase a house for 400,000.Thebuyerpaysa400,000. The buyer pays a 40,000 deposit. The contract states that if the buyer breaches, the seller may retain the deposit as liquidated damages. The buyer breaches, and the seller resells the house for $390,000.

Answer: The seller may keep the 40,000depositifthecourtfindstheamountreasonableandnotapenalty.Ifthedepositisexcessive,thesellermaybelimitedto40,000 deposit if the court finds the amount reasonable and not a penalty. If the deposit is excessive, the seller may be limited to 10,000 (the difference between the contract price and resale price).

Worked Example 1.2

A seller refuses to convey a unique parcel of land to the buyer, who wants the property for a new business. The buyer sues for specific performance.

Answer: The court will likely grant specific performance, ordering the seller to convey the property, because damages would not adequately compensate the buyer for the loss of unique land.

Exam Warning

On the MBE, be alert for facts indicating whether the liquidated damages amount is reasonable. If the deposit is large compared to the contract price, consider whether it is an unenforceable penalty.

Revision Tip

If a question involves a real estate contract with a liquidated damages clause, always check if the amount is reasonable and whether the clause is exclusive of other remedies.

Key Point Checklist

This article has covered the following key knowledge points:

  • Expectation damages are the standard remedy for breach of a real estate contract.
  • Specific performance is usually available to buyers due to the uniqueness of land.
  • Sellers may obtain specific performance, but damages are often sufficient.
  • Liquidated damages clauses are enforceable if reasonable and not a penalty.
  • The non-breaching party may also recover incidental damages and expenses.
  • The choice of remedy depends on the contract terms and the nature of the breach.

Key Terms and Concepts

  • Breach of Contract
  • Expectation Damages
  • Specific Performance
  • Liquidated Damages
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