Can a Buyer or Seller Cancel a Real Estate Contract Without Penalty?
In the vast majority of cases, real estate transactions begin with all parties having every intention of completing the process and closing. Unfortunately, life does happen, and at times, either the Buyer or Seller needs to cancel the transaction. If either party has a contingency or other valid justification for cancelling the Contract, then said party likely can cancel and not have any repercussions; and, in the Buyer’s case, any Earnest Money Deposit (the “EMD”) held in escrow will be returned.
However, if either party decides to cancel a real estate contract without justification or a valid contingency, there are certainly important considerations to keep in mind before doing so. When faced with the question of what will happen if either party decides to cancel, we often hear, “Well, what’s the worst that can happen? I just lose my EMD, right?” (or in the case of a Seller, “I just give the Buyer their money back, right?”) As will be made clear below, the answer to that question is no, that is certainly not the “worst that can happen.”
Real Estate Contract Dispute Resolution Explained
Section 16 of the FAR/BAR contracts (the “Contracts”) provides that the Buyer and Seller shall attempt to settle any disputes in an amicable manner through mediation, using the services of a certified mediator or one who has experience in the real estate industry. The parties must split any fees associated with mediation services equally.
Key Points of the FAR/BAR Dispute Process
10-day “Cooling Off Period” for EMD disputes
- If the dispute involves the EMD, Section 16(A) requires that, even before mediation, the parties seek to resolve the matter on their own during a 10-day period following the conflicting demands for the EMD (I like to refer to this as the “Cooling Off Period”).
Mandatory mediation before legal action
- If the dispute is not resolved during the 10-day Cooling Off Period or via mediation, either party may seek to resolve the matter in equity by instituting the appropriate action in the court having jurisdiction over the matter.
Legal remedies include litigation and attorney’s fees
- The prevailing party is entitled to recover not only any costs and fees associated with the filing of the action but also reasonable attorney’s fees associated with the litigation.
What Happens if the Buyer Defaults on the Contract?
The Contracts defines “Default” as either party failing, neglecting, or refusing to perform their obligations under the Contracts, including payment of the Deposit(s) within specified timeframes.
Seller’s Legal Options After Buyer Default
If a Buyer defaults, Seller has two options:
Retain the EMD as liquidated damages
- Seller may elect to retain the EMD as Liquidated Damages in full settlement of any claims, and thereby Seller and Buyer will relieve each other from all obligations under the Contract.
File a lawsuit seeking damages or enforcement
- Seller may, pursuant to Section 16 as described herein, proceed in equity and seek to enforce Seller’s rights in court, including potential claims for damages.
What Happens if the Seller Defaults on the Contract
Similarly, if the Seller defaults, Buyer has two options to consider pursuant to the Contracts:
Buyer’s Legal Options After Seller Default
Recover EMD without waiving claims
- Buyer may choose to receive the return of their EMD without any obligation to release Seller from any claims resulting from Seller’s default.
Pursue damages or request specific performance
- Buyer may seek to recover damages in the proper court or seek specific performance, i.e., the Buyer may seek an order from the court requiring the Seller to complete their obligations pursuant to the Contracts.
The Earnest Money Deposit is Not Always the End of the Story
So, the next time a Buyer or Seller asks the question, “What’s the worst that can happen?” Make sure the answer is not simply that the EMD will be returned to the Buyer, because as discussed above, that is certainly not the worst that can happen!
If you have any questions about contract disputes, defaults, or any other real estate legal questions, we encourage you to reach out to your local trusted real estate attorney.
