Question: I signed a contract to purchase a house, and settlement was scheduled to take place last week. I obtained a mortgage loan, and showed up at the title attorney's office ready to go to closing. Only the Seller's real estate agent was there, and advised me that the Seller has changed his mind.
Apparently, the Seller was unable to locate another place in which to live and now has decided to stay in the house.
What should I do?
Answer: This often happens in a seller's market, when a seller believes that she can get a better offer for the property. In your case, however, it appears that the seller is struggling with a classic case of "seller's remorse".
The first thing I would do is to try to talk directly with the Seller. Perhaps you can reach an agreement whereby you will go to settlement, but allow the seller to rent back the property for a month or two. You must confirm this arrangement with your lender, to make sure that these terms will be acceptable. You do not want the lender to believe that you are buying an investment property rather than one in which you will personally reside.
If the seller is agreeable to this, have your attorney prepare a license -- not a lease -- for the agreed upon period of time that the seller will remain in the property.
Why a license? There is a technical, legal distinction between a lease and a license. In general terms, a lease conveys exclusive possession of the premises to the tenant, which triggers the application of landlord-tenant laws. Many of these laws are often pro-tenant.
A license, on the other hand, merely gives the licensee permission to use the property, and can be terminated at any time. While the licensor would still have to go to the appropriate landlord-tenant court to evict the licensee, the process is much easier -- and less expensive -- than if you have to comply with the panoply and complexity of the landlord-tenant laws in the jurisdiction where your property is located.
If the seller refuses to accept your proposal, you should carefully read the sales contract. What does it say about a seller default?
In the Washington metropolitan area, most real estate brokers will use the Regional Sales Contact. Paragraph 26 of the contract, entitled "Default," states:
If Seller fails to perform or comply with any of the terms and conditions of this Contract or fails to complete Settlement for any reasons other than Default by Purchaser, Purchaser will have the right to pursue all legal or equitable remedies, including specific performance and/or damages.
Thus, according to your contract, you have three alternatives:
- You can ask to get your money back and have the contract terminated. If you go this route, you should also make sure that all of your out-of-pocket expenses are reimbursed. Keep in mind that you have probably paid for a home inspection, and may have given your lender an up- front deposit in order to obtain your mortgage loan. The settlement attorney will charge you a "cancellation fee," since he has ordered a title search and a survey in anticipate of the scheduled settlement date.
- You can sue the Seller for damages. Did you start looking for another house, and is it comparable to the Seller's property? Have mortgage interest rates increased? Were you diligent in immediately searching for another house? If you decide to pursue damages, discuss the pros and cons of this kind of litigation carefully with your attorney. The measure of damages is difficult to prove.
- You can sue the Seller for specific performance. This is the "equitable remedy" referenced in paragraph 26 of the Sales Contract.
What is specific performance? Oversimplified, you ask the Judge to order that the Seller be directed to sell the property to you.
There is an interesting case involving singer Roberta Flack which gives attorneys guidance on how the courts will respond to such suits. In Flack v Laster, the District of Columbia Court of Appeals explained that "specific performance of a contract is ordered when the legal remedy, usually money damages, is deemed to be either inadequate or impracticable. When land is the subject matter of the agreement, the legal remedy is assumed to be inadequate, since each parcel of land is unique; thus equitable jurisdiction in this case is firmly established."
The Court went on to state:
A purchaser seeking specific performance must show that he was ready, able and willing to perform the contract. He must also show that any delays were not caused willfully by him, and that the seller was not harmed by the delays. Where no time is specified for the performance of an act, the law implies that it must be done within a reasonable time.
Litigation, of course, is always time consuming, expensive and uncertain. Should you decide to file suit, make sure that you also request that the Court grant you attorneys fees should you prevail. Our Courts follow what is known as the "American Rule" on attorneys fees, namely, each side pays his/her own lawyer, unless there is a specific law authorizing such fees (such as a consumer protection act) or there is a contract between the parties which requires the losing party to pay those fees.
In the Regional Sales Contract, paragraph 24 specifically authorizes such fees to be paid to the prevailing party.
