Friday, July 19, 2019

Sellers Can Be Forced to Convey

LAW LAW MATTERS

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Real estate sale are a big part of Southwest Florida’s economic engine. Investors, property managers, rental agents, sales agents and others all have an economic interest in real estate transfers. From time to time, a seller loses interest in meeting contract terms and conveying property to a buyer. If the buyer does not agree to simply walk away, the buyer has options when the seller defaults.

Perhaps the simplest buyer option is the right to sue the seller for damages. The measure of damages for breach of contract is generally the amount of money that would place the buyer in the position the buyer would be in if the seller did not default. That usually means the difference between contract price and the value of property on the scheduled closing date. If the property was resold by the seller, the measure of damage is more easily determined as the profit made by the seller on a subsequent sale. In either case, the buyer may also recover interest and any additional expenses arising directly from the seller’s default. This is generally known as the “benefit of the bargain” rule.

When the buyer has his or her heart set on buying that special property, getting money from the seller may not be much satisfaction. The common law recognizes that concept, by confirming that real property is unique. Because real estate is considered unique (including condominium units, even though they may seem identical), money damages may not make a buyer whole. A buyer facing a seller who refuses to perform can sue the seller for specific performance of the contract.

Specific performance is equitable relief and will only be awarded when damages would not make the buyer whole. Since real estate is considered unique, a real estate contract qualifies. The court must determine that forcing the seller to comply with the contract is both equitable and can be accomplished.

The equity issue is reviewed by the court to determine whether forcing a seller to convey property is fair. What constitutes fairness usually does not mean fairness to the seller, since it is the seller who is at fault. Fairness may involve impact on a third party.

Ability to actually convey the property would include such issues as whether the seller is still the owner, that title is still marketable and that the property remains in good condition. If the buyer remains willing and the court can accomplish specific performance by ordering the seller to convey, the court can also award damages to pay expenses of the buyer. Those damages can include increased expense of mortgage financing due to delay, lost rental income and even cost of repair.

When a contract purchaser seeks specific performance, the court is not limited to granting that request. If it cannot be granted for some reason or the court determines it should not be granted, the court can still award damages. In that case, the damages would be similar, if not identical, to what the buyer could have sought without specific performance.

The recent case of D&E Real Estate v. Vito is a good example of how a court can hold the seller’s feet to the fire. In that case the seller indirectly allowed a title cloud to render title unmarketable. The buyer sued for specific performance and the seller argued that the contract had expired because the closing date passed and at closing date the title remained unmarketable. The appellate court ruled to the contrary, noting that the contract provided a 30-day title cure period and that the closing date fell in the middle of the seller’s time to remove the cloud on title. It further ruled that the seller had an obligation to make a diligent effort to cure and that it failed to do so. The buyer was entitled to a judgment for specific performance.

To make sure a seller does not sell to an innocent third party, which would affect a specific performance claim, the jilted buyer can record a notice of the lawsuit in the Public Records where the property is located. The notice is known as a lis pendens and it places the world on notice that there is a lawsuit involving the title to the property. That prevents a third party from acquiring title without notice and claiming protection as an innocent purchaser for value. That makes a lawsuit for a specific performance a powerful weapon in a buyer’s arsenal.

Sadly, the threat of a specific performance lawsuit can be used by an unscrupulous buyer as a form of legal blackmail. When such buyers are unable to close and want to either buy time, get back a deposit that would otherwise be forfeited or even more money from a seller, the buyer can pursue any action for specific performance in which it alleges some material default by the seller. Alternatively, the buyer may threaten such an action. The case would likely be decided against the buyer, but the buyer could hold up the property until final determination of the lack of merits by a court. Although Florida law provides sanctions for frivolous lawsuits, when the buyer is a limited liability entity, the buyer may not be too concerned with the possibility that a court may enter a judgment for attorney fees and damages in favor of the seller.

Because real estate is unique, specific performance is available to buyers. But what about sellers? Believe it or not, sellers in Florida can sue buyers for specific performance of real estate sale contracts. The seller sues the buyer to require the buyer to perform a contract by accepting a deed to the property upon payment of the purchase price. The seller gets a judgment for the purchase price and for an accounting and then pursues the recoverable assets of the buyer, including the property involved, for the amount due. If the buyer does not pay, the seller can sell the property to a third party and apply the net proceeds to the amount due from the buyer.

Lawsuits by sellers seeking specific performance are rare, because they ultimately end up similar to a claim for damages. That means sellers are more likely to sue a buyer for damages, which means the difference between sale price and what the property is worth (or what the property actually sells for later) plus any incidental damages incurred by seller (mortgage expense, taxes, and other cost the seller would not have incurred if the buyer had closed).

Specific performance can be a powerful option when a real estate seller defaults. It gets the buyer the property plus the buyer’s expenses and can eliminate any benefit to a seller who has changed his or her mind. The ability of a buyer to force a seller to convey can help keep a reluctant seller on track and the threat of suit may stop a seller from defaulting. As such, it is an important option of a buyer.

William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.

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