By: John B. Newman, Retired
What happens when parties to a real estate contract arrive at a scheduled closing, fail to agree on a minor adjustment for a condition of the property, and never close? Traditionally, one would expect that if the property was not in the condition required by the contract at closing, the seller would be in breach and the buyer would not be obligated to close. However, the answer is not always that simple.
In the not atypical scenario of Herbert v. Howell, there was a lot of bad blood between the parties before the closing. The seller had a bridge loan outstanding to buy another property; the parties jousted over the closing date for their respective convenience; finally, the buyer set a time of the essence closing date.
At the walk-through inspection of the property the afternoon of the scheduled closing, the buyer observed boxes stacked in the garage. At the closing later that day, the buyer’s attorney demanded that $10,000 be placed in escrow to ensure that the seller would promptly remove the boxes from the garage post-closing. However, the seller only offered to escrow $2,000. As an alternative the seller also offered a “dry closing” where the paperwork would be completed but no funds would be disbursed until he removed the boxes in a day or two, but the buyer would not agree to that proposal. Since negotiations appeared to be at a stalemate, the sellers and their counsel left without making further arrangements for a new closing date.
Two days later, when the seller’s attorney called the buyer’s attorney, the buyer’s attorney said, “the deal is dead” because the buyer had found another property. The buyer contracted to buy this second property and ultimately closed on it.
When the buyer’s attorney declared that the seller was in breach of contract and demanded release of the $40,000 deposit, litigation followed.
At trial – two years later – the court held that both parties defaulted under the contract:
There was a case of who is bluffing who and neither party blinked and the closing didn’t occur. That’s what I found happened. . .
So if there was an effort on both parties to bring about this closing that they both wanted, it would have been done. It would have been done. [Sellers] would have gotten word across to [buyer] through their counsel or through the realtor or whatever saying we want this closing. We worked ourselves to a frazzle over the weekend, everything is out of there. We even dragged that stupid satellite dish off of there, we want to close, can we still close it.
Based on the conclusion that both parties breached, the court ruled that the parties should equally divide the $40,000 deposit, reasoning:
Clearly, both parties were unreasonable in failing to reach an agreement to resolve the problem created by defendants’ failure to vacate all of their belongings from the property. Plaintiff’s request for defendants to place $10,000 in escrow and defendants’ suggestion of a “dry” closing until the remaining property was removed, were both reasonable. Unfortunately, neither side would agree to the other’s proposal. Defendants walked out of the closing without trying to extend the agreement or to establish a new closing date.
The first lesson is that it is fine to be tough and to stand on your contractual rights – to a point. That point is where your position is completely unreasonable in light of the totality of the circumstances. Then you put yourself at risk of being held in breach of contract.
The other lesson from this case is not to let your emotions cloud your judgment. Obviously, the buyer and seller hated each other by the closing date. The attorneys may not have had much better regard for each other either. Animosity clearly clouded the parties’ better judgment.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.