As published in the August 2009 edition of CondoBusiness.
A drastic change in the real estate market can be a scary thing, especially when you are counting on the closing of your sale to fund your purchase. It is not uncommon to see a chain reaction of transactions that do not close (followed of course, by a chain reaction of law suits). It is no excuse for not closing your purchase, to say that you were unable to do so because the Buyer of your home defaulted. In the late 1980’s, I sold a house a couple of days prior to the stock market crisis on October 19, 1987, commonly known as Black Monday. Scared and not knowing how to protect the closing funds in order to close my upcoming purchase, I took the cash out of my bank account and put it in a large safety deposit box. Whether this was an intelligent move or not is debateable, but it does demonstrate the anxiety that one has about being able to close, in this case, one’s spouse’s dream home. So what if anything can you do to protect yourself against the Buyer of your home attempting to walk away from the purchase transaction that you so desperately need to close the purchase of your dream home?
1. A Brief Primer On The Law: The first thing that you need to know is that contrary to popular belief of some, a Buyer cannot just walk away from his or her deposit without further ramifications. The law is that a defaulting Buyer is liable to compensate you for any difference (loss) in the sale price (and associated costs as a result of the default) between the sale price agreed to between the two of you, and the resale price that you are able to obtain. The deposit stands as a credit to such amount and in many cases, can be retained in any event even if the loss is less than the deposit. Therefore, if your loss is greater than the deposit, you can sue the Buyer for damages. If you win, and the Buyer has assets that you can seize, then you will be able to collect the difference.
2. Make Sure You Have Good Title To Your Property: The easiest way for a Buyer to resile from a transaction is because of a defect in title. The time and the place that you usually ensure that you have good title is when you purchase your property however, for various reasons, it is not uncommon to see defects in the title to a piece of property. Therefore, pull the reporting letter that you received from your lawyer on the purchase and see if there are any qualifications as to title. There shouldn’t be, but sometimes, you as a Buyer might have been willing to accept something less than perfect title. It is also possible that your lawyer made a mistake or failed to register some document, resulting in a title defect. The next thing you can do for peace of mind purposes, is to have your present lawyer conduct a search of title to your property to see if there is anything there that would permit a Buyer to resile from the transaction. If there is something there, it is better for you to find it out early and cure it, rather than wait for a Buyer who may be waiting in the weeds to spring the title defect on you at a late date making it difficult if not impossible to cure in time for closing.
3. Have Your Lawyer Review Your Agreement Of Purchase And Sale: I find it strange that when agreeing to the most expensive purchase of most persons’ lives, they do not hire a lawyer to review the agreement of purchase and sale prior to signing it. There are many things that a lawyer can suggest to you to insert into the agreement of purchase and sale to prevent or to dissuade a Buyer from resiling from the transaction, or to alert you to problems which may permit a Buyer to resile if not cured. For example, a lawyer might suggest a larger deposit, the proper wording for conditions, an early requisition date (the date when title defects must be brought to the seller’s attention), the proper legal description of the property, the deletion of provisions which you may not be able to comply with, a forfeiture of deposit provision in the event of default by the Buyer and more.
4. Get A Large Deposit: The reasoning behind a large deposit is obvious. The larger the deposit at risk, the less likely a Buyer will be walk away from it and the more incentive the Buyer will have to close the transaction.
5. Have Your Lawyer Keep In Contact With The Other Side’s Lawyer And Request Your Lawyer To Advise You Of Anything Out Of The Ordinary : The Buyer’s lawyer is not likely to reveal to your lawyer that the Buyer is thinking of resiling from the transaction, but a sharp Seller’s lawyer who is paying attention, may be able to discern danger signals from what the Buyer’s lawyer does or doesn’t do. So, if you are concerned about the possibility of the Buyer resiling from the transaction, discuss it with your lawyer and ask that he/she keep an eye out for danger signals and report to you at the first sign of smoke.
6. Arrange Bridge/Alternate Financing Just In Case Worrying in the middle of the night is unpleasant and can be avoided. If you really want to be safe, arrange standby bridge or alternate financing that is not dependant upon the sale of your home. Not everyone is in the fortunate position to be able to do this, however you may be one of .the lucky ones who are able to arrange such financing from a financial institution, family of friends.