Learning Outcomes
This article explains remedies for breach of real estate contracts, including:
- Identifying the main legal and equitable remedies available when a land sale contract is breached, and connecting each remedy to typical fact patterns tested on the MBE.
- Applying the formulas and limits for expectation, reliance, restitutionary, consequential, and incidental damages, and determining which measure best compensates the non-breaching party under bar-exam style questions.
- Determining when specific performance is likely to be granted or denied for buyers and sellers, considering adequacy of legal remedies, fairness, equitable defenses, and feasibility of enforcement.
- Analyzing the enforceability and consequences of liquidated damages clauses, especially earnest-money deposits, including when a stated amount is treated as a valid forecast of loss versus an unenforceable penalty.
- Distinguishing between buyer and seller remedies such as damages, rescission, restitution, and specific performance, and spotting when a party must elect among inconsistent remedies on the exam.
- Evaluating how equitable conversion, risk of loss rules, marketable title problems, and "time is of the essence" clauses shift the availability and scope of remedies between contract and closing.
MBE Syllabus
For the MBE, you are required to understand remedies for breach of real estate contracts, with a focus on the following syllabus points:
- Types and measures of damages in land sale contracts (expectation, consequential, incidental, reliance, restitution).
- Availability and limits of specific performance for buyers and sellers.
- Enforceability and effect of liquidated damages clauses and earnest money deposits.
- Election among remedies: damages, specific performance, rescission, and restitution.
- Distinctions between buyer’s and seller’s remedies on breach (including good-faith seller breach).
- Effect of equitable conversion and risk of loss on remedies.
- Impact of “time is of the essence” clauses and delay in closing.
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.
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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?
- The full contract price.
- The difference between the contract price and the resale price.
- The buyer’s deposit.
- The cost of improvements made by the seller.
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Which remedy is most likely to be granted to a buyer when a seller refuses to convey unique real property?
- Money damages only.
- Rescission.
- Specific performance.
- Punitive damages.
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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?
- The deposit is nominal.
- The amount is reasonable and not a penalty.
- The seller suffers no loss.
- The buyer acted in good faith.
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A contract for the sale of land closes two weeks late because the buyer’s lender was slow to fund. The contract does not say that “time is of the essence.” The seller now claims the contract automatically terminated on the original closing date. What is the most accurate statement?
- The contract automatically terminated on the closing date.
- The delay is a material breach that bars specific performance.
- The delay is usually only a minor breach; specific performance remains available.
- The contract is void for lack of definite time for performance.
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After signing a land sale contract, but before closing, a fire destroys the house on the property without fault of either party. The jurisdiction follows the majority equitable conversion rule. If the buyer still wants the property, what is the most likely result?
- Buyer can rescind and get all payments back.
- Buyer must proceed and pay the full price, but can seek insurance proceeds if available.
- Seller bears the loss and must rebuild or reduce the price.
- The contract is automatically void and neither party has further obligations.
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, the conduct of the parties, and sometimes on doctrines such as equitable conversion and marketable title.
Key Term: Breach of Contract
The failure of a party to perform a contractual obligation when performance is due.
At exam level, questions often require you to choose among remedies—damages, specific performance, liquidated damages (usually deposits), rescission, and restitution—and to understand how these interact. You also must know when a buyer’s remedies differ from a seller’s and how risk of loss is allocated between contract and closing.
Types of Remedies for Breach
Remedies for breach of a real estate contract fall into two main categories: legal (damages) and equitable (specific performance and rescission). 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.
At common law, expectation damages are limited by the usual contract doctrines of foreseeability, mitigation, causation, and reasonable certainty.
Seller’s Damages
If the buyer breaches, the seller’s basic expectation measure is:
- Difference between the contract price and the fair market value (or resale price) at the time of breach, plus
- Reasonably foreseeable incidental damages (such as expenses for resale, additional carrying costs, or broker’s fees), minus
- Any costs saved by not having to perform.
Key Term: Incidental Damages
Reasonable costs incurred by the non-breaching party in dealing with the breach, such as expenses of arranging a substitute transaction or preserving the property.
If the seller resells the property in good faith and in a commercially reasonable manner, the resale price is strong evidence of market value. Many exam questions simplify and treat the seller’s damages as:
- Contract price − resale (or market) price at time of breach.
If the seller later resells for a higher price than the original contract price, the seller generally has no damages—the breach actually benefited the seller.
In addition, the seller may, in some circumstances, be able to retain the buyer’s deposit (see liquidated damages below), but that right is constrained by rules against penalties.
Buyer’s Damages
If the seller breaches, the buyer’s expectation measure is:
- Difference between the market value of the property at the time of breach and the contract price, plus
- Incidental and consequential damages (if foreseeable and proven), minus
- Any amounts the buyer has saved by not having to perform.
Key Term: Consequential Damages
Losses that flow from the breach in a way that was reasonably foreseeable at the time of contracting, such as lost profits from an intended use of the property.
For example, if the seller knows the buyer plans to develop the land immediately, lost profits from a foreseeable delay or inability to develop may be recoverable as consequential damages, subject to the usual limits of certainty and mitigation.
Where the seller breaches but acted in good faith—for example, the seller discovers at closing that title is defective and cannot be cured despite reasonable efforts—many jurisdictions limit the buyer’s recovery to reliance-type losses (out-of-pocket expenses) rather than full expectation damages.
Key Term: Reliance Damages
Damages designed to reimburse the non-breaching party for expenses reasonably incurred in reliance on the contract, putting that party back in the position as if the contract had never been made.
Reliance damages might include inspection costs, loan application fees, title search charges, and similar expenditures.
Key Term: Restitution
A remedy that requires the breaching party to disgorge benefits unjustly retained, restoring the non-breaching party the value of any benefits conferred.
If the buyer has paid part of the price, restitution may allow recovery of that payment, subject to any valid liquidated damages clause.
Key Term: Rescission
An equitable remedy that terminates the contract and aims to restore both parties to their pre-contract positions, usually accompanied by restitution of payments made.
Rescission is particularly appropriate where there is fundamental misrepresentation, failure of marketable title, or mutual mistake.
Worked Example 1.1
A buyer contracts to purchase a house for $400,000. 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’s actual expectation damages are $10,000 (the difference between the contract price and the resale price), plus incidental damages if any. The seller may keep the $40,000 deposit only if the liquidated damages clause is enforceable—meaning the amount is a reasonable forecast of probable loss and not a penalty. If $40,000 is found excessive in relation to anticipated or actual loss, the clause may be struck as a penalty, and the seller is limited to actual damages of $10,000 (with the remainder of the deposit returned).
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 land is presumed unique and money damages would not adequately compensate the buyer. The buyer must show a valid contract, that the buyer is ready, willing, and able to perform, and that no defenses (such as laches or unclean hands) bar equitable relief.
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.
Specific performance is available only if:
- There is a valid, definite, and enforceable contract.
- The non-breaching party has fulfilled (or is ready, willing, and able to fulfill) their own obligations.
- Legal remedies (money damages) are inadequate.
- Enforcement is feasible and fair, and no equitable defenses apply.
Buyer’s Right to Specific Performance
- A buyer can almost always obtain specific performance if the seller refuses to convey title, because damages are usually inadequate given the uniqueness of real property.
- However, specific performance will not be granted if:
- The seller has already conveyed the property to a bona fide purchaser for value without notice of the earlier contract; or
- Equitable defenses such as laches (unreasonable delay), unclean hands, or unfairness in the contract bar relief.
Key Term: Bona Fide Purchaser
A person who acquires property for value and without notice of prior rights or claims, and who is therefore protected against certain prior interests.
Courts can tailor relief, such as specific performance with abatement—ordering the seller to convey what they can and reducing the price to reflect a defect (for example, slightly less acreage or a minor title encumbrance), if the buyer is willing to accept less than what was promised.
Seller’s Right to Specific Performance
A seller may also seek specific performance to compel the buyer to pay the price and complete the purchase. This is conceptually available because the seller’s right to the purchase price is unique to this contract.
In practice, however, courts are less inclined to grant specific performance for sellers because money damages—difference between contract and market or resale price, plus incidental damages—usually adequately protect the seller.
Delay and “Time Is of the Essence”
Exam questions frequently test the effect of delayed closing dates.
In most jurisdictions:
- Time is not presumed to be of the essence in land sale contracts.
- If the parties fail to close on the scheduled date, the failure is often treated as a minor breach, not grounds for automatic rescission.
- The non-breaching party may be entitled to damages caused by the delay, but specific performance generally remains available if the other elements are satisfied.
Key Term: Time Is of the Essence
Contract language making timely performance a material term, so that failure to perform on time is a material breach.
A “time is of the essence” clause (often in bold or capital letters) makes punctual performance material. In that case, a substantial delay may be a material breach, allowing the non-breaching party to terminate and seek remedies. However, courts sometimes soften rigid application of boilerplate clauses if the surrounding circumstances show that exact timing was not genuinely important.
Equitable Conversion and Risk of Loss
Between contract and closing, the parties’ interests in the property change in equity.
Key Term: Equitable Conversion
The doctrine under which, upon execution of a specifically enforceable land sale contract, the buyer is treated as holding equitable title and the seller as holding legal title as security for the purchase price.Key Term: Risk of Loss
The allocation of responsibility for accidental damage or destruction of the property between contract and closing when neither party is at fault.
Under the majority rule:
- Once a specifically enforceable contract is signed:
- Buyer holds equitable title and bears the risk of loss if the property is destroyed without fault before closing.
- Seller holds bare legal title and a right to the purchase price.
Under a minority rule (and under the Uniform Vendor and Purchaser Risk Act in some jurisdictions):
- The seller bears the risk of loss until legal title or possession passes to the buyer.
The risk-of-loss allocation affects remedies:
- If the risk is on the buyer, and the property is destroyed, the buyer must still pay the full price (subject to insurance and any contract provisions), but can still insist on specific performance.
- If the risk is on the seller, destruction of the property may excuse the buyer’s obligation or entitle the buyer to rescind and recover payments.
Worked Example 1.3
Buyer and seller sign a land sale contract for $300,000. Before closing, and without fault of either party, a wildfire destroys the house. The jurisdiction follows the majority equitable conversion rule. Buyer still wants the property.
Answer:
Under the majority rule, the buyer has equitable title and bears the risk of loss. The buyer must proceed with the purchase and pay the full $300,000, but can seek to benefit from any insurance on the property if the policy or contract so provides. The seller must convey legal title as agreed; specific performance is available to both sides.
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.
To be enforceable:
- The amount must be a reasonable forecast of probable loss at the time of contracting, and
- Actual damages must be difficult to estimate in advance.
- The clause must not operate as a penalty (i.e., grossly disproportionate to anticipated loss).
In many jurisdictions, deposits up to around 10% of the purchase price are often presumed reasonable in real estate transactions, but the exam will test you based on the facts given, not a bright-line rule.
If the clause is enforceable:
- The seller may keep the deposit as the sole remedy if the clause so states, or
- The clause may be non-exclusive, allowing the seller to elect between liquidated damages and other remedies.
If the clause is excessive and treated as a penalty:
- It is not enforceable.
- The seller is limited to proven actual damages.
- The buyer can recover any portion of the deposit that exceeds those actual damages (subject to restitution principles).
Key Term: Election of Remedies
The requirement that a party choose among inconsistent remedies (e.g., full expectation damages versus liquidated damages or specific performance), rather than recover multiple inconsistent forms of relief for the same breach.
A party generally cannot obtain both specific performance and full expectation damages for the same breach. However, a court may combine specific performance with incidental damages for delay or minor defects.
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. Also check whether the clause is described as the seller’s “sole remedy,” which can bar additional damages.
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. Then ask whether the non-breaching party must elect between that clause and other remedies such as specific performance.
Marketable Title and Remedies
Many seller breaches on the exam involve marketable title—for example, undisclosed easements or covenants.
Key Term: Marketable Title
Title reasonably free from doubt and the risk of future litigation, so that a prudent buyer would accept it in the ordinary course of business.
If the seller cannot deliver marketable title by closing:
- The buyer may:
- Rescind the contract and demand restitution of payments; or
- Seek specific performance with abatement (if the defect is minor and buyer is willing to accept the property); and
- Recover damages (often limited to reliance if the seller acted in good faith).
After closing, merger usually applies—the buyer must look to covenants in the deed rather than the contract, and remedies shift toward deed covenant damages rather than contract 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.
- Seller’s damages are usually the difference between the contract price and the fair market (or resale) price at the time of breach, plus incidental damages.
- Buyer’s damages are generally the difference between market value and the contract price, plus incidental and consequential damages, subject to limits such as foreseeability and mitigation.
- Where the seller breaches in good faith (e.g., cannot convey marketable title despite reasonable efforts), many jurisdictions limit the buyer to out-of-pocket (reliance) expenses.
- Rescission and restitution allow unwinding the contract and restoring parties to their pre-contract positions, particularly where marketable title cannot be conveyed.
- Specific performance is usually available to buyers due to the uniqueness of land, provided the contract is definite and fair and the buyer is ready, willing, and able to perform.
- Sellers may obtain specific performance, but courts often view damages as adequate in seller-breach situations.
- Liquidated damages clauses (often involving deposits) are enforceable if reasonable and not a penalty; excessive deposits may be struck down, limiting the seller to actual damages.
- The non-breaching party generally must elect among inconsistent remedies; they cannot recover both full expectation damages and specific performance for the same breach.
- Delay in closing is not automatically a material breach unless time is expressly of the essence; specific performance usually remains available for modest delays.
- Under the majority equitable conversion rule, the buyer bears the risk of loss between contract and closing; under minority rules or statutes, the seller may bear that risk.
- Inability to deliver marketable title entitles the buyer to rescission, restitution, and often specific performance with abatement, depending on the nature of the defect.
Key Terms and Concepts
- Breach of Contract
- Expectation Damages
- Specific Performance
- Liquidated Damages
- Incidental Damages
- Consequential Damages
- Reliance Damages
- Restitution
- Rescission
- Marketable Title
- Equitable Conversion
- Risk of Loss
- Time Is of the Essence
- Bona Fide Purchaser
- Election of Remedies