Publications

Phillip C. Querin
Partner - Portland, Oregon Office

philquerin@dwt.com
(503) 241-2300

Sellers' and Buyers' Remedies Under the Real Estate Sales Agreement
[June 2003]

In most consumer transactions, residential real estate included, sellers and buyers frequently do not pay much attention to the remedy provisions of their transactional documents. This can be for a variety of reasons: (1) They feel they already know what their remedies are; (b) They really aren’t concerned with the issue, since they do not anticipate any enforcement problems; (3) They simply aren’t interested. Regardless of the reasons – and there may be others – the responsibility for explaining the remedies, as well as other significant portions of the Sale Agreement, falls on each party’s Realtor®.

Before considering the actual legal remedies, Realtors® should remember that the mediation of most disputes under the Sale Agreement is a necessary first step in any dispute resolution process. (See, Section 38.)¹ If mediation is skipped and the matter goes to arbitration, there is a risk that the prevailing party would be denied the recovery of attorney fees. Accordingly, at the outset of any dispute exceeding the $5,000 Small Claims Court jurisdictional limit, the party seeking the relief (“the complainant”) should first make an offer to mediate. Only if the other side (“the respondent”) ignores or refuses to do so, should the complainant take the matter directly to arbitration.

Sellers’ Remedies

The seller remedies portion of the Sale Agreement is found at Section 29. This is an important section, especially the last line, which summaries the seller’s remedies as follows:

It is the intention of the parties that under no circumstances shall buyer be liable to seller under this Agreement beyond the amount of earnest money provided for herein.²

In the event that the buyer breaches the agreement, e.g. by refusing to perform, this clause will have the effect of limiting the seller’s remedy to retention of buyer’s earnest money deposit. It makes no difference whether the buyer’s failure to perform occurs at the start of the transaction or on the day before closing.

Although this clause is not, in itself, harsh, its effect can be devastating to the seller who has taken only a small earnest money deposit, then, upon the belief that a closing will occur soon, proceeds to make other plans, such as purchasing another home, and incurs substantial expenses along the way. Since retention of the buyer’s earnest money deposit is the seller’s sole remedy, determining the amount of the deposit to take is an important consideration. Here are some factors to consider when determining the amount of earnest money to demand: (a) Is the buyer well-qualified, or are there risk factors that might make default a distinct possibility? (b) What are the sellers’ plans – i.e. will they be acquiring another home shortly, or will they be making other arrangements, such as moving out of state – that will make the buyer’s default costly? (c) What is the sale price of the home?³ (d) Is it a buyer’s or seller’s market?⁴

Since the seller’s remedy is limited to retention of the earnest money deposit, it is important that the Realtor® discuss with the seller whether the property should be removed from the market after the Sale Agreement is signed. If the home is attractive and well-presented, it may generate back-up offers, which can be useful in protecting the seller from the adverse consequences of a first buyer’s default.⁵

Lastly, sellers should not be shy about asking for additional earnest money deposits either when the Sale Agreement is first being negotiated, or later when the buyer seeks a concession, such as an extension of time, which could adversely impact the seller if a default occurred then. The bottom line is that the more money the buyer has in the transaction that is subject to forfeiture in the event of breach, the greater likelihood that the buyer will be incented to close the transaction.⁶

Buyer’s Remedies

The remedies available to the buyer are broader than those available to the seller. First, in the event of a seller default, the buyer has the right to a full refund of the earnest money deposit. In addition, the Sale Agreement provides:

However, acceptance by Buyer of the refund shall not constitute a waiver of other legal remedies available to Buyer.⁷

The practical and legal effect of this clause is that if the seller defaults – usually by refusing to close the transaction – the buyer has the right to demand his/her earnest money deposit back and pursue any other claims that would flow from the seller’s breach. For example, if the seller failed or refused to close, and the buyer incurred $15,000 in moving expenses from out of state, the buyer could seek recovery of those damages, in addition to recovery of the earnest money deposit.

However, in many cases, buyers are not interested in recovering money damages, since it is the home they want. In such cases, the buyer should not demand the return of the earnest money agreement, but rather insist upon the seller’s full performance in accordance with the terms of the Sale Agreement. This remedy is called “specific performance.” While most cases of seller non-performance are the result of a change of mind, occasionally there are cases in which the seller agrees to sell, but later learns that he/she cannot convey marketable title (e.g. the liens on the property exceed the purchase price, or the title contains a defect that the seller cannot remove). In these cases, the buyer’s primary remedy would not be specific performance, but damages⁸ in addition to a refund of the earnest money deposit.

In specific performance cases, the buyer should attempt to do all things required of him or her under the terms of the agreement. This means applying for financing, having the home inspected (if access is available) and even appearing at closing to sign documents. This helps establish that they are “ready, willing and able” to perform. However, since the law does not impose upon buyers the obligation to perform “useless acts” if the seller has denied access, refused to perform, and told escrow he/she will not sign, some steps may be unavailable to the buyer simply because of the seller’s non-cooperation.

Generally, however, it is wise for sellers who wish to pursue a specific performance claim, to act promptly, and make sure that the seller could never argue that they buyer failed to perform. This is especially true with financing. The buyer should do everything possible to obtain a loan commitment.

One of the dangers of seeking specific performance is that the seller could do something precipitous, such as transferring title to the property to a third party, or encumbering the property with a loan, easement or deed restriction. It is for this reason that the filing of a lis pendens is appropriate and necessary. A lis pendens is simply a recorded notice, filed in the county where the property is located, telling the world that the property is currently in litigation (or if filed under the provisions of the Sale Agreement, in arbitration.) This gives priority to the buyer over other claims against the title that are later recorded.

Since the need to file the lis pendens is usually immediate, and since it cannot be filed without there first being an underlying claim filed, the buyer must decide quickly about his/her course of action, upon learning that the seller will not close the transaction. This means that a claim usually must be filed with the appropriate arbitration service – even before the mediation has occurred.⁹

Conclusion

As can be seen from the above discussion, the sellers’ and buyers’ remedies are substantially different. In the event the buyer fails to perform, the seller is limited to retention of the earnest money deposit. For this reason, listing agents should be careful to make sure their sellers are fully apprised of the risks of proceeding with an inadequate deposit. If the seller refuses to perform, the buyer’s remedies are wide open, ranging from damages to specific performance.¹⁰ In such cases, Realtors® need to act promptly, encouraging their clients to seek legal counsel, since time is of the essence.

FOOTNOTES

1 However, if the matter is within the jurisdiction of the Small Claims Court, i.e. $5,000 or less, mediation through the Sale Agreement protocol does not apply, since it is already a part of the Small Claims Court process. Remember, however, Small Claims Court only involves money claims. Any other non-monetary remedy sought by a buyer or seller would not be available in Small Claims Court.
2 This clause appears in bold at lines 200-201 of the current Sale Agreement form, which was last revised in July 2002.
3 The price of the home should not be used for application of a “rule-of-thumb” approach, e.g. 10% of the sale price, or other such formulas. The amount of earnest money is supposed to reflect a genuine pre-estimate of the seller’s damages – not just a simple percentage of the sale price. The use of “rules-of-thumb” that do not bear any reasonable resemblance to the seller’s actual damages could be struck down by the arbitrator as a penalty, and not a valid liquidated damage provision. If this occurred, the seller would be left to “prove” the amount of his/her actual damages resulting from the buyer’s breach, and this is oftentimes very difficult to do, since it is hard to quantify a seller’s lost opportunities from other buyers who did not make an offer.
4 If it is a seller’s market, i.e. there are fewer sellers than buyers – i.e. inventory is low – the seller is in a stronger position to demand a larger deposit than if it is a buyer’s market, where there is a glut of available homes for buyers to chose from. Buyer’s and seller’s markets can occur geographically, e.g. desired locations in a broader community, or financially, e.g. in certain price ranges throughout the community.
5 Oregon law does not require that real estate licensees continue to market the seller’s home after an offer has been accepted.
6 I have intentionally omitted a discussion of “non-refundable” earnest money deposits. While there may be certain circumstances under which it is appropriate, doing so requires some skill in drafting, since there are printed portions of the Sale Agreement which provide that the deposit will be refunded under certain circumstances. Accordingly, extreme care should be used before attempting to draft a provision making the buyer’s deposit “non-refundable.”
7 This clause appears at lines 196-197 of the current Sale Agreement form, which was last revised in July 2002.
8 Such damages would normally be measured by the difference between the purchase price and the market value of the home, i.e. giving the buyer “the benefit of the bargain.” Unfortunately, if the sales price and market value are the same, this measure of damages would not be available to the buyer.
9The filing of arbitration before mediation is permissible under the OREF Sale Agreement. See, lines 259-260. In such cases, it is prudent to file the Statement of Claim in arbitration and expressly state, Buyer hereby offers to mediate this claim.”
10 Generally, the buyer cannot get both specific performance and damages, except in those cases where the specific performance itself is inadequate to make the buyer whole – e.g. the Sale Agreement provided that the seller would pay for certain repairs, which were never done.

© Copyright 2003. Phillip C. Querin, Davis Wright Tremaine. No part may be reproduced without the author’s express written consent.