It happens all the time. You’ve made it to the day of closing, and your buyer discovers that the seller has failed to live up to some obligation of the contract. Maybe they didn’t make the repairs to the roof that they promised to in an addendum, or maybe you’ve found out that they failed to tell you about that plumbing problem they had a few years back. In any case, now you have a distressed and angry buyer blowing up your phone and demanding to cancel the contract because “they’re just not comfortable with the property anymore.”
What to do? Can the buyer terminate? Who has more risk here? The seller is clearly in default, so they should be on the hook, right? If the answer were a simple “yes,” this would be a short blog. But ultimately, the buyer’s right to terminate will depend on how serious the seller’s breach is. There is a legal concept of “materiality” which looks to whether or not a breach of contract is serious enough to allow a party to call for the termination of the agreement. A breach is considered “material” if it “goes to the essence of the contract” (whatever that means), and at the end of the day, a judge or jury is who will tell parties whether a particular breach is material.
If a breach is considered to be material then it excuses the non-breaching party from further performance under the contract – in effect, they may terminate it. On the other hand, if the breach is determined not to be material, then the non-breaching party is obligated to perform under the contract, and may still pursue the other side for any damages they suffered as a result of the breach. Sellers have it easy: the obligations that a buyer has under a real estate contract generally have to do with the payment of deposits and closing funds, and the failure to timely make those payments is material. The analysis is a little more difficult for buyers, though, since a seller’s obligations are more varied.
How does that play into the scenario above? Let’s go with the seller’s failure to disclose that plumbing issue. Clearly, it’s a breach of the contract. They filled out the seller’s disclosure form, and they marked “no” when they were asked, “Have there been any plumbing leaks since you have owned the property.” But as far as your buyer’s inspector can tell there are no active plumbing leaks, and it’s been several years since the leak occurred. That probably wouldn’t be considered to be a “material” breach that allows the buyer to terminate the agreement…very likely, it will never injure the buyer in any way. If the buyer decides that they are going to terminate the agreement on the basis of that breach, they may well find that they have materially breached the contract by failing to close, and have put their deposit at risk. Ouch.
Usually, it is more difficult to make a decision as to whether a particular breach is or is not material. The standard for making that judgment call is not objectively defined, and it is ultimately determined by what a judge or jury thinks. So any time a party takes the drastic step of choosing not to move forward with a contract as a result of a breach, careful consideration should go to what risk they are undertaking in doing so. Real estate attorneys may not always be able to give you a definite answer on this point, but they can help parties make a better-educated guess.
Alternatively, the parties can come to an agreement that removes the risk of that guess entirely (for both the buyer and seller). A seller can agree to purchase a home warranty for the buyer to make up for their “forgetful” disclosure, or they can agree to a repair agreement for that roof that is designed to survive the closing. Any agreement that recognizes the existing breach and provides an effective post-closing mechanism for its remedy will be far superior to the parties throwing the dice on whether or not a particular breach is or is not “material.” Your local real estate attorney can help you navigate all of these issues – give them a call!
Daniel C. Guarnieri, Esq. DGuarnieri@berlinpatten.com
Berlin Patter Ebling