Is it Legal for a Seller to Back out of a Contract With a Buyer?
The answer to this question is not easy to find.
It all depends on the circumstances. In general, if the buyer fails to perform, the seller has the right to cancel the contract, provided the seller followed the contract’s provisions regarding notice to the buyer to perform. Missing a deposit or a closing deadline is an example of failure to perform.
Backing out of a home sale is very common, especially in a hot real estate market. Even when the seller lacks a clear legal right to renege on a deal, it is possible.
Even though such cases occur frequently, it is generally a tough situation for the seller. Normally, you would prefer to be on the buyer’s side. It is easier for a buyer to cancel and more difficult for a seller to avoid paying a penalty.
Buyers have the upper hand because most home purchase contracts include provisions that protect them and keep the purchase process moving forward. Unless a buyer fails to perform, sellers who want to renege face an uphill battle.
Why Would a Home Seller Want to Cancel Their Sales Contract?
Here is more information on the most common scenarios in which a home seller can cancel a purchase agreement:
Being unable to find a new place to live.
Many contracts allow the seller to cancel the sale if they are unable to find a new home or relocate before the closing date.
Using the attorney review clause.
Some real estate contracts include — and some states require — an attorney review clause, which allows each party’s attorney to review the contract for several days after it is signed. If either party wants to back out of the deal, they can do so without penalty within that time frame.
Lack of a clear title to transfer.
If a title search reveals that the seller’s home has outstanding liens, disputes, or claims, they will be unable to sell it.
The buyer “fails to deliver.”
The contract will specify a timetable for meeting deadlines during the escrow period (the period between signing the contract and closing). If the buyer fails to meet closing deadlines or make scheduled deposits, for example, they may be found in breach of contract, and the seller may be able to walk away from the sale without penalty.
It is permitted by the buyer’s contingencies.
Most contingencies in a contract are intended to protect the buyer’s interests, but in many cases, they can also provide an “out” for the seller. Assume a buyer has an inspection contingency requiring the seller to allow a home inspection. If the inspection reveals a major flaw, the buyer may request that the seller pay for repairs or reduce the sale price. If the seller wishes to terminate the contract, they can take advantage of the buyer’s contingency by refusing to complete the repairs or lowering the price.
Unwanted details that startle the buyer.
The law requires a seller to disclose specific information about a home during the sale process, but a seller who is desperate to get out of a contract may decide to reveal even more to a buyer in the hope that these dirty details will scare them away. The only issue with this strategy is that in some cases, a seller must disclose to all future buyers anything they have previously disclosed to a buyer.
The buyer accepts it.
A seller’s ticket out of an impenetrable contract is sometimes simply asking the buyer to release them from the contract. A buyer is not required to agree to such a thing, but it never hurts to ask.
Make a Written Record of Everything
It’s a good idea to protect yourself when it comes to real estate. All purchase offers, counteroffers, and acceptances must be in writing and signed by all parties involved in the contract. A binding agreement is typically reached when the seller accepts the buyer’s signed offer or counteroffer and communicates that acceptance to the buyer.
The homeowner is under no obligation until a contract is signed. In most cases, an oral agreement is not legally binding. A written contract to sell real estate is required.
Are There any Consequences for Sellers Who Back Out?
There sure are! Backing out of a home sale can be expensive.
Legally, it can be extremely difficult to do so once a contract has been signed. Real estate contracts are typically written to protect home buyers. A seller’s best chance of successfully backing out of a sale is if a contract contingency is not met. For example, suppose a contract expressly states that the seller must be able to secure a new home, but he or she is unable to do so. In such cases, the seller may have valid reasons to withdraw from the sale.
In many cases, however, a home seller who breaches a purchase contract can be sued for breach of contract. A judge could order the seller to sign a deed and proceed with the sale regardless.
A seller is frequently required to pay both the buyer’s and his legal fees. That could be a severe punishment.
In addition, the seller may be ordered to:
- Return the good faith deposit plus interest to the buyer.
- Refund any inspection and appraisal fees paid by the buyer.
- Pay for any lost equity the buyer may have had in the home.
- Pay any other reasonable expenses incurred by the buyer.
- Pay the listing agent’s lost commission and marketing expenses.
A seller who wants to avoid a court battle may offer to pay the buyer enough to make them whole in the hope that they will agree to end the transaction.
However, because a breach of contract is a civil matter, a seller does not face jail time. In most cases, there is no criminal penalty for breach of contract.
How Can a Home Seller Avoid Paying Penalties?
Home sellers can give themselves an “out” by including contingencies in the sales contract that condition the sale on certain conditions. A seller, for example, can condition the sale on having a contract to buy another house so they have a place to live. Alternatively, the seller can gain contractual leeway by including a time frame or deadline for all purchase offers.
In most cases, a seller cannot cancel without cause. You could plan for a contingency, but in the absence of one, you should be 100% committed to the sale. There must be a contingency in case the buyer fails to perform.
One common reason for buyer failure is the inability to secure a mortgage. If for whatever reason, the buyer’s lender does not appraise the home at a value that would secure financing, the seller has the option to cancel the contract due to the buyer’s failure to perform in terms of securing financing.
