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.
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