“Don’t Walk Away” – When a Home Buyer Walks Away After Waiving Contingencies, Their Losses Might be More than Meets the Eye

With interest rates rising, the past few months have seen a surge in home buyers backing out of purchase agreements.  CNBC reported that the usual cancellation rate of about 12% had surged to above 20% in several US cities.  Redfin reported that 65,000 buyers backed out in December 2022.  A buyer’s breach can leave sellers in a bind, especially if they purchased a new property.

In instances where a buyer of a California residential property has removed all contingencies, yet still attempts to walk away from the sale, the conventional wisdom is that the consequences are limited.  If a standard California Association of Realtors’ agreement is used, the thinking goes, then the breaching buyer’s liability is limited to 3% of the purchase price – sometimes lower depending on the boxes checked and the amount actually deposited into escrow.

Sellers who watched a buyer walk away might not see a new buyer step in.  They may eventually be forced to sell at a much lower price and hope that they insisted on a sufficient deposit.  But they might be happy to know that contrary to common belief, they can get specific performance, or use that remedy as leverage.

Specific performance is a remedy in what lawyers and judges call equity.  Instead of money damages, equitable relief will result in a court order requiring a party to perform some act.  Specific performance in the present context means requiring the buyer to complete the purchase on the same terms.  Alternatively, the buyer can be required to put the seller in the same position as if the sale had occurred.

Many websites discussing a seller’s remedies when a buyer walks away state that specific performance is not available when damages are a sufficient remedy. But California statutes and law point in a different direction.

A seller suffering breach can elect specific performance as a remedy even if damages are available to seller such as under Civil Code section 3307.  BD Inns v. Pooley (1990) 218 Cal.App.3d 289, 295-296.  A buyer’s willingness to pay liquidated damages do not protect him from specific performance.  Civ. Code § 3389.  The existence of an adequate remedy at law does not preclude a specific performance remedy.  BD Inns, 218 Cal.App.3d at 295-96.  Even for a seller seeking specific performance, a buyer’s breach of an agreement to transfer real property is rebuttably presumed to not be adequately relieved by pecuniary compensation.  Civ. Code § 3387.

This means that after a buyer has waived all contingencies and walked away, a seller who cannot sell the property for near the same price should seriously consider demanding that the buyer perform.  The seller could complete the sale, or obtain a settlement in excess of the liquidated damages or funds deposited in escrow.  Where a greater settlement is obtained, this could make it more feasible for the seller to sell to a new buyer offering a lower price.

Nor should a buyer defend by arguing that interest rates have changed.  The fairness or adequacy of consideration cannot be judged or estimated in relation to events which transpired subsequent to the time of the conveyance; if the consideration was adequate at the time, subsequent events such as a change in property value are immaterial.  Lundgren v. Lundgren (1966) 245 Cal.App.2d 589, Berkeley Lawn Bowling Club v. City of Berkeley (1974) 42 Cal.App.3d 280, 290, Hastings v Matlock (1985) 171 Cal.App.3d 826, 839.  Unless impossibility or impracticability can be established, a mere change in market conditions is likely to be irrelevant.  However, a court or arbitrator may be more likely to order specific performance if the buyer can provably perform, such as an investor who simply doesn’t want a less favorable interest rate.

Taken together, this means that sellers suffering breach may have more options than they think.  They should explore the full extent of their rights when a buyer who waived all contingencies walks away.

 

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