Consequences of Backing Out of a Deal

by Dian Hymer

Occasionally sellers have a change of heart and won't go through with a sale. Sometimes buyers back out of a transaction at the last minute.

Just how serious are the consequences when some one backs out of a real estate deal? The answer depends largely on the terms of the purchase contract. This will vary from one transaction to the next.

Generally, there are two issues to consider. First, does the contract include unsatisfied contingencies? These may protect the buyers or sellers under the circumstances. Second, are any default remedies or dispute resolution clauses included in the contract?

For example, let's say sellers are selling the home of a relative who died. The administrator of the estate favors selling the property. But, a contingency is included in the contract for all heirs to approve the terms of the sale. All of the heirs do not approve the sale. In this case, although the buyers may be devastated by the news that the sale is off, the sellers have the right to withdraw from the contract without suffering any consequences.

Recently, sellers had a transaction fall apart because their buyers (Buyer No. 1) were selling a home to Buyer No. 2, who backed out at the last minute. Buyer No. 1 didn't suffer any consequences, other than extreme disappointment, because their purchase contract included a clause stating that their offer was contingent on the satisfactory closing of the sale of their home. Their home sale didn't close, so they didn't have to proceed with the purchase.

Buyer #2, however, backed out for no good reason. They simply had a change of heart after they had removed all contingencies from the contract. These buyers could risk losing their deposit money, a lawsuit from the sellers, an arbitration proceeding, mediation or a small claims court action. It all depends on the terms of their contract.

Had the contract involving the estate sale not included a contingency giving the sellers a legitimate way out of the contract, these sellers could have suffered legal consequences. The buyers might have been entitled to sue the sellers for monetary damages. Or perhaps the buyers could have sued to force the sellers to comply with the contract. The sellers might have been obligated to mediate or arbitrate, depending on the terms of the contract. If the contract allowed, the buyers might have had the right to take the sellers to small claims court.

There's a big difference between a deal that falls apart because a contingency can't be satisfied and one that falls apart for a reason that's not provided for in the contract. A contract that collapses for a reason not allowed in the contract is called a breach or default.

First Time Tip: Don't automatically assume that because the other party isn't going forward with the sale that the contract is breached. For example, let' say the contract has an inspection contingency. The inspections reveal defects that the seller refuses to fix. The seller may have a legitimate way out of the contract.

Now, let's say you're the buyer of a property you no longer want. You decide to use your inspection contingency to get out, but you never have the property inspected. The sellers may be able to make a case against you for not acting in good faith. You could then be subject to damages.

The Closing: Always consult a knowledgeable real estate attorney if you have any questions about what constitutes a default or breach of contract.