When a Buyer or Seller Defaults on a Real Estate Contract

What happens when a buyer or seller defaults on a real estate contract? Well in Georgia as of 8/1/2018, the earnest money (good faith money, deposit...) will be of great interest as the ability for the parties to sue is limited. Our friends at Campbell and Brannon, Attorneys at Law provide this concise overview.

When a Buyer Defaults on a Real Estate Contract

In the event this Agreement fails to close due to the default of Buyer, Seller’s sole remedy shall be to retain the earnest money as full liquidated damages. Seller expressly waives any right to assert a claim for specific performance. The parties expressly agree that the earnest money is a reasonable pre-estimate of Seller’s actual damages, which damages the parties agree are difficult to ascertain. The parties expressly intend for the earnest money to serve as liquidated damages and not as a penalty.

What changes for sellers? With this new change, Seller’s sole remedy for a Buyer’s breach is to accept the Earnest Money as full liquidated damages. Prior to this change, the Seller had the right to pursue “any lawful remedy” such as suing the breaching Buyer for specific performance and/or the losses Seller incurred, which could include the difference between what they could have sold the home for to the Buyer versus another person, Seller’s legal fees, Seller’s additional moving expenses, Seller’s rent, etc. However, in most cases when a Buyer breached the contract, the Seller would accept the Earnest Money and move on, selling the home to another buyer.

When a Seller Defaults on a Real Estate Contract

In the event this Agreement fails to close due to the default of Seller, Buyer may either seek the specific performance of this Agreement or terminate this Agreement upon notice to Seller and holder, in which case all earnest money deposits and other payments Buyer has paid towards the purchase of the Property shall be returned to Buyer following the procedures set forth elsewhere herein.

What changes for buyers? With the new change, a Buyer’s remedy for Seller’s default shall be 1) to sue for specific performance or 2) terminate the contract with the return of Earnest Money. In the past, the Buyer could seek all lawful remedies which could have included consequential damages, attorney’s fees, extra moving expenses, rent during holdover, etc.

These changes take effect in Georgia on 08/01/2018 and it's easy to see that home sellers need to be savvy to the "worst case scenario"; a buyer that fails to close after contingencies expire. Recourse is limited to receipt of earnest money, which can also be contested.

 It should be brutally obvious that it's critical to understand a real estate contract, how to construct one and how to manage one. Yet, how many buyers and sellers seem to ignore all of this? Some go into a deal unrepresented or permit "dual agency"; how can one agent effectively represent a buy and seller? Can a lawyer both prosecute and defend someone at the same time? Yet, this occurs fairly often.

It bears repeating that a real estate transaction isn't a 22 minute episode on HGTV; this often gets tangled and occasionally deals collapse. Buyers and sellers that don't take the time to ensure they work with seasoned pros might find themselves in very bad situations that could have been avoided. This is a business transaction involving hundreds of thousands of dollars, treat it like that.

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