Buyer Default on a Residential Transaction

Last week, we blogged about the consequences and legal options available when a seller defaults on a residential contract in Florida. But what happens when the buyer defaults? What recourse is available to the seller, and how can a buyer protect themselves from inadvertently defaulting on a contract?

One of the key issues for both parties is which contract the parties sign.  For most sellers, a standard contract for residential purchase is ideal, because it provides very limited reasons for a buyer to cancel the contract. Many buyers, however, may prefer to sign the FAR/BAR As Is contract. The As Is contract provides a limited time for the buyer to conduct inspections, during which the buyer can cancel the contract for any reason, even if simply due to a change of mind.  After the inspection period buyers that cancel are faced with losing the deposit or the seller filing a lawsuit for damages or specific performance.

Which, brings us to the next key factor in protecting a party from buyer default.  The default provision of the contract lists the parties’ respective remedies in the event of default, and may provide for mandatory mediation or arbitration to resolve a dispute prior to litigation.

First, many default provisions provide that in the event of buyer default, the seller may elect to claim the security deposit in full settlement of all claims arising from the default.  This is often the remedy sellers elect, but may not be enough to fully compensate the seller for his damages.  Moreover, a dispute over a deposit will ultimately result in a lawsuit in which the escrow agent is paid its attorney fees before any of the deposit funds are awarded to the parties.  The unfortunate result is that, in many occasions, the winning party is left with little or no recovery because all or most of the deposit was paid to the escrow agent’s attorney. Sellers can usually also elect the option to file for specific performance, but that is very rarely a successful claim in Florida.

In any contract for the purchase of real estate, a seller is best protected by making sure that the seller can elect to sue the buyer for all damages incurred due to the buyer’s default.  Conversely, buyers are best protected by limiting the seller’s remedies to retaining the security deposit in full settlement of all damages, and include a small security deposit amount in the contract.

As to mandatory mediation or arbitration clauses, mediation is often a cost-effective way to settle a dispute.  However, mandatory arbitration clauses can prove to be cumbersome, expensive and not in the best interest of a party.  Arbitration requires significant filing fees (far more than filing a lawsuit in most cases), is time consuming and expensive, with the parties paying both their attorneys and the mediator, and the decision can not be appealed except in extreme cases. Therefore, I usually recommend parties to agree to a mediation provision but to steer clear of mandatory arbitration clauses.

Therefore, we highly recommend that any party entering into a contract for the sale and purchase of real estate to contact a real estate attorney to review and provide advice on the contract’s terms before signing. Should you have any questions regarding the foregoing, we urge you to consult with your local real estate attorney.

Sincerely,
Berlin Patten Ebling, PLLC
Article Authored by Michelle Champion, Esq. mchampion@berlinpatten.com
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.
 
 
SARASOTA
1819 Main Street, Suite 1000, Sarasota, FL 34236   P (941) 954-9991  F (941) 954-9992
 
VENICE
247 South Tamiami Trail, Suite 201, Venice, FL 34285  P (941) 955-9991  F (941) 484-9992
LAKEWOOD RANCH
8130 Main Street, Suite 206, Lakewood Ranch, FL 34202   P (941) 907-9022  F (941) 907-9024

Misconception of AS-IS Contract and Disclosure

When a party sells a property, they are required to fill out a Seller’s Real Property Disclosure Statement (“Property Disclosure”).  This Property Disclosure covers a wide array of questions about the condition of the property and knowledge of facts that materially affect the property.  Many are unaware that these disclosures are mandated by Florida law.  Often, sellers proceed quickly through the Property Disclosure checking “no” for all answers without taking the time to read and contemplate the answer to each request for disclosure.  It is important to be aware of the potential liability that can result for a seller who does this.

A seller is required to disclose any known facts or conditions about their property that have a substantial impact on its value or desirability and that others cannot easily observe.  Failure to do so can result in a future lawsuit for the seller on the basis of their failure to disclose.

The belief that having an As-Is Contract negates the requirement to disclose is inaccurate.  An As-Is Contract never grants a seller the right to omit items on their Property Disclosure and does not waive a buyer’s right to pursue a seller for failing to disclose a known defect which was not readily observable to them.  In fact, even an As-Is Contract followed by a buyer’s inspector failing to observe the defect does not waive a buyer’s right to pursue a seller for failing to disclose a known defect.

In order for a seller to protect themselves from a potential lawsuit after the sale of their property, it is important that the seller read through the Property Disclosure and ensure that their answers are as accurate and honest as possible. As always, should you have any questions about Subsurface Rights, please contact your real estate attorney.

Sincerely,

Berlin-Patten, PLLC

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

www.berlinpatten.com

SARASOTA

1819 Main Street, Suite 1000, Sarasota, FL 34236   P (941) 954-9991  F (941) 954-9992

VENICE

247 Tamiami Trail South, Suite 201, Venice, FL 34285  P (941) 955-9991  F (941) 484-9992

LAKEWOOD RANCH

8130 Main Street, Suite 206, Lakewood Ranch, FL 34202   P (941) 907-9022  F (941) 907-9024

Major Differences Between the As Is Contract and the Regular FAR/BAR Form

The As Is Contract and Regular Florida Realtors/Florida Bar Contract forms are essentially the same with the following exceptions:

1. Heading. Of course, the inclusion of “As Is” in the heading sometimes draws concern and can create minor angst for Sellers since they don’t want Buyers to get the impression that the Property is substandard.

2. Inspection Period. The biggest difference is in the Inspection Clause under Paragraph 12 of the As Is Contract compared to the Regular Contract. Under the Regular Contract, the Buyer has the earlier of 15 days after the Effective Date of the Contract, or 5 days prior to closing, to complete inspections and deliver notice to Seller. Seller has 5 days from receipt to obtain repair estimates and deliver to Buyer, or to obtain a second inspection if Seller disagrees with Buyer’s inspection report. If Seller obtains a second inspection and the reports differ and the parties can’t agree, the parties jointly share the cost of a third inspection which results are binding on both parties. In contrast, the As Is Contract gives the Buyer a “free look” at the Property during the Inspection Period. The Inspection Period, if left blank, is 15 days after Effective Date. If Buyer determines in Buyer’s sole discretion that they no longer want the Property, Buyer can terminate by notifying Seller prior to the Expiration of the Inspection Period. Many real estate attorneys prefer the As Is Contract form over the Regular Contract form for both Buyers and Sellers since the parties don’t have to argue over whether the item is in “Working Condition” or whether it is a “Cosmetic Condition” under the Contract. Consequently, the parties typically can reach an agreement with regards to the repair items and proceed with closing.

3. As Is Maintenance Requirement. Even though the Buyer is purchasing the Property in “As Is” condition, the Seller still has to maintain the Property up to Closing in the same condition existing as of the Effective Date of the Contract. Consequently, if the air conditioning system stops working after Buyer has completed their inspections, but prior to Closing, Seller has to pay to repair the air conditioning system under the As Is Maintenance Requirement under Paragraph 11 of the As Is Contract.

4. Permits. Under the Regular Contract, upon Buyer’s notice to Seller of permit issues, Seller has to close out open or expired permits and obtain permits for any unpermitted improvement up to the Permit Repair Limit under Paragraph 9 of the Regular Contract. In contrast, under Paragraph 12c of the As Is Contract, Seller just has to cooperate in assisting Buyer with the permits, but Seller does not have to spend any money to do the same.

5. Waiver. Under Paragraph 18x of the As Is Contract, Buyer waives any claims against Seller, and to the extent allowed by law, against any realtor involved in the Contract negotiations for any defect or damage existing at Closing but discovered later by Buyer or anyone claiming by, through, under or against the Buyer. This Waiver is not included in the Regular Contract nor is it included in Rider K, the As Is Rider.

Depending on the circumstances, the As Is Contract might be the preferred contract for the parties over the Regular Contract. For instance, the As Is Contract form is used in short sale transactions and with bank owned properties. In situations where the Buyer wants the benefit of the Repair, WDO and Permit Limits but still wants a “free look” at the Property, then use the Regular Contract and attach Rider L, the Right to Inspect and Right to Cancel Rider. As always, should you have any questions regarding any of the foregoing, please do not hesitate to contact a member of the Berlin Patten team.

Sincerely,
Berlin-Patten, PLLC

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

http://www.berlinpatten.com

SARASOTA
1819 Main Street, Suite 1000, Sarasota, FL 34236 P (941) 954-9991 F (941) 954-9992

VENICE
100 W. Venice Avenue, Suite A, Venice, FL 34285 P (941) 955-9991 F (941) 953-9992

LAKEWOOD RANCH
8130 Main Street, Suite 206, Lakewood Ranch, FL 34202 P (941) 907-9022 F (941) 907-9024

SHORT SALE CONTRACT DEPOSIT DEADLINES – EFFECTIVE DATE OR UPON SHORT SALE APPROVAL?

Originally Published: 5/4/2012

With 2012 being the year of the Short Sale, you need to be familiar with differences in the contract forms being used in the marketplace. Typically, in a short sale transaction, we are seeing the Florida Realtors/Florida Bar (“FR/BAR”) As Is Residential Contract form (“As-Is Contract”) being used along with either the FR/BAR Short Sale Approval Contingency Rider (“Rider G”), or the Florida Realtors Short Sale Addendum (“SSA-3”).

If Rider G is used with the As-Is Contract, the Initial Deposit deadline is tied to the Effective Date not Buyer’s receipt of the Short Sale Approval from Seller. Under Paragraph 5 of Rider G, all the time periods computed from the Effective Date commence upon Buyer’s receipt of Short Sale Approval from Seller with the exception of the Initial Deposit, Short Sale Approval Deadline and Contract Expiration Date. As the current Chair of the FR/BAR Attorney Realtor Committee and having served on the Sub-Committee that drafted Rider G, we felt that it was important that a Buyer actually place money in Escrow to show that the Buyer was serious about purchasing the Property.   We wanted to discourage Buyers from entering into numerous short sale contracts tying up a Seller’s property with no real intent on purchasing the property or worst yet flipping it to someone for a higher price. Therefore, if you are using the As-Is Contract and Rider G and check the third box and leave the number of days blank, then the Initial Deposit is due 3 days from the Effective Date and not Buyer’s receipt of Short Sale Approval unless you provide otherwise i.e. on Line 28 “Effective Date” is changed to “Buyer’s receipt of Short Sale Approval from Seller”.

In contrast, if you use the As-Is Contract with the SSA-3 and check the first box under Paragraph 3 of the SSA-3, then except for Approval Deadline, all time periods, including deposit(s), commence from Buyer’s receipt of Short Sale Approval from Seller. If you check the second box under Paragraph 3 of the SSA-3, then all time periods commence from the Effective Date. Also, keep in mind when using the SSA-3 that the Closing Date is not changed by SSA-3 like Rider G which under Paragraph 6 changes the Closing Date to a specified number of days after Buyer’s receipt of Short Sale Approval from Seller which is 45 days if left blank.

In summary, it is important for all parties involved in a short sale transaction that the parties are serious about the transaction.   Therefore, the Buyer should be required to deliver a deposit up front and not upon Buyer’s receipt of Short Sale Approval to show that the Buyer is willing to tie his/her money up pending receipt of the Short Sale Approval from Seller which hopefully will discourage Buyers from entering into numerous contracts either hoping to flip it for a higher price or go with the first one that receives short sale approval.