What You Should Know about Breaching a Contract for the Real Estate License Exam

By John A. Yoegel

These situations you’ll need to know for the Real Estate License Exam are the kind in which one of the parties but not the other refuses to do what he or she promised in the contract to do. A number of remedies and actions can be taken when a breach of contract occurs. State exam writers expect you to know these different remedies.

When the buyer refuses to go ahead with the real estate contract

When a buyer defaults and refuses to buy the house that she signed a contract to buy, even though the seller wants to go ahead with the sale, here’s what the seller can do.

  • Forfeit the contract: In this case, the seller formally declares the contract forfeited. The seller typically is entitled to keep whatever money the buyer already has put into the deal. A liquidated damages provision in the contract deals with this.

  • Rescind the contract: After a buyer defaults, the seller declares the contract rescinded. This statement puts everyone back in the same position as when the contract never existed. Suppose the seller receives a higher offer a few days after signing a contract of sale. The buyer’s money is returned, and the seller rescinds the contract.

  • File suit for compensatory damages: The seller brings a lawsuit against the buyer for monetary damages that the seller believes he has experienced because the buyer defaulted on the contract. An example is when the seller sues a buyer because he has lost a deposit on a house he was going to buy. The deposit was paid only after he had a signed contract to sell his own home.

  • File suit for specific performance: The purpose of this kind of lawsuit, which the seller brings against the buyer, is to force the buyer to buy the house. In a buyer’s market — one in which there are more sellers than buyers and houses are selling slowly — the seller may use this remedy whenever finding another buyer is going to be difficult.

When the seller refuses to go ahead with the real estate contract

When the seller defaults, even though the buyer is prepared to go ahead with the deal, the seller refuses to sell the house. Here are the remedies at the buyer’s disposal:

  • Rescind the contract: The buyer can rescind the contract and basically let the seller off the hook. The buyer’s money is returned and the contract no longer exists.

  • File suit for compensatory damages: In this case, the buyer sues the seller for monetary damages because the buyer believes she has suffered because of the seller’s default.

    For example, a buyer sells her house and is living in a rented apartment with her furniture in storage because she’d signed a contract to buy another house, but the seller defaulted. The buyer can sue the seller for the cost of the rent and storage charges that she has to pay while looking for another house.

  • File suit for specific performance: This type of lawsuit is designed to force the seller to go ahead with the sale. Given the fact that no two properties are exactly alike, this remedy may be pursued when monetary damages won’t satisfy the buyer, and the buyer really wants a particular house.