What Happens When a Buyer Breaches a Purchase Agreement?
When a buyer breaches a purchase agreement, the seller can typically pursue liquidated damages (keeping the deposit), sue for actual damages, or seek specific performance to force the buyer to complete the purchase.
Key Takeaways
- Rules vary by state; always learn your specific state's requirements.
Contracts on the Real Estate Exam
Buyer default scenarios are a favourite exam topic because they bring together several contract law concepts: liquidated damages, specific performance, and actual damages. The exam often presents a fact pattern where a buyer backs out and asks what remedies are available to the seller.
Understanding Contracts: Key Concepts
Overview
When a buyer fails to complete a real estate purchase as agreed, the seller has several potential remedies. The appropriate remedy depends on the terms of the contract and the circumstances of the breach.
Consequences and Enforcement
The most common remedy in residential transactions is liquidated damages. If the purchase agreement includes a liquidated damages clause (and both parties have agreed to it), the seller can retain the buyer's earnest money deposit. This is a quick, clean resolution that avoids litigation. However, by accepting liquidated damages, the seller gives up the right to pursue additional remedies.
Consequences and Enforcement
If no liquidated damages clause applies, or if the seller believes their actual losses exceed the deposit amount, the seller can sue for actual (compensatory) damages. Actual damages typically include the difference between the contract price and the price at which the property eventually sells, carrying costs during the delay (mortgage payments, taxes, insurance), and additional marketing or transaction costs.
The seller can also seek specific performance, asking a court to order the buyer to complete the purchase. While theoretically available, this remedy is rarely pursued by sellers in practice because forcing an unwilling buyer to purchase is difficult to enforce.
One important limitation across all states: the seller cannot "double dip" by keeping the liquidated damages and also suing for actual damages. The seller must choose one remedy.
Contracts Rules by State
Each state has its own rules when it comes to contracts. Here are a few examples of how requirements differ:
California
The C.A.R. purchase agreement includes a liquidated damages clause that must be separately initialled. The cap is 3% of purchase price for owner-occupied residential property (1-4 units). If the clause is not initialled, the seller must pursue actual damages through the courts.
Texas
Under the TREC contract, the earnest money is held by the title company. If the buyer defaults, the seller's remedies depend on which option was selected in the contract. Texas allows for liquidated damages, actual damages, or specific performance, but the specific TREC form provisions govern the process.
Florida
Under the FAR/BAR contract, the deposit serves as liquidated damages if the buyer defaults. Florida has a specific statutory process for earnest money disputes: if the parties cannot agree, the broker must notify the FREC within 15 business days and either request an escrow disbursement order or submit to mediation or arbitration.
When the exam presents a buyer default scenario, read carefully to see whether a liquidated damages clause was agreed to. If yes, the answer is almost always that the seller retains the deposit. The key follow-up: the seller cannot also sue for additional actual damages after accepting the liquidated amount.
Rules vary across all 50 states
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