Jonah Patel
In the context of a residential sales contract, a default occurs when either the seller or the buyer fails to meet the terms of the contract and agreement. While defaulting on a real estate contract is rare, it can have significant legal and financial implications for the parties involved. In New York, a default typically happens when a buyer refuses to close for a reason not outlined or contemplated in the contract. This can result in the seller keeping the deposit as liquidated damages and taking legal action for monetary damages or specific performance. Understanding the default clause and the potential consequences of defaulting is crucial for both buyers and sellers in residential sales contracts.
| Characteristics | Values |
|---|---|
| Default | Occurs when either the seller or the buyer fails to meet the terms of the contract and agreement. |
| Contingencies | Conditions based on which the deal will be canceled without either party being in default. |
| Contract deposit | The seller can keep the buyer's earnest money payment (down payment) in case of default. |
| Lawsuit | The seller can sue for monetary damages for breach of contract. |
| Specific performance | The seller can sue for specific performance, i.e., force the buyer to settle, although this is rarely granted by the court. |
| Inspection | An inspection of the property should be conducted before signing the contract. |
| Mortgage financing | The buyer should line up any necessary mortgage financing during the escrow period. |
| Title search | The attorney will conduct a title search to ensure no liens or other issues are outstanding against the property. |
| Closing | The closing date is when the title to the home is transferred, money is exchanged, and the balance of the purchase price is due. |
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What You'll Learn
The default clause
For buyers, a default can occur if they fail to put the initial deposit (good faith deposit) into escrow on time, cancel the sale after removing all contingencies, or do not complete the sale due to problems with securing funds. If buyers default, sellers can keep the buyer's earnest money (down payment) and may also sue for specific performance, forcing the buyer to complete the sale, or for monetary damages for breach of contract.
For sellers, a default can occur if they do not provide required information in a timely manner, refuse to schedule or attend the closing, or fail to complete required work before the closing. If sellers default, buyers can sue for monetary damages for breach of contract, termination of the contract, and the return of their deposit, and/or specific performance, forcing the completion of the sale.
It is important to note that contingencies in the sales contract should be clearly outlined, and deadlines for each contingency should be specified. An inspection of the property and a review of all contract terms and conditions are crucial steps before signing a residential sales contract. Additionally, sellers' attorneys must keep the deposit in an escrow account while the sale is pending.
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Seller and buyer obligations
In New York, a residential sales contract is not legally binding until a contract of sale is signed by both the buyer and the seller. This contract should include terms such as the price, contingencies, and closing date. Once the contract is signed, both parties are legally obligated to proceed to settlement.
Seller Obligations
Sellers should ensure that they are ready, willing, and able to sell the property. If the seller defaults on the contract, the buyer can sue for monetary damages for breach of contract, termination of the contract, and the return of their deposit. Sellers can also be found in default if they:
- Do not provide the loan payoff information, or any other required information, in a timely manner to the title company (escrow)
- Cause a delay in closing due to not signing off on time
- Refuse to schedule or attend a sign-off to sign the closing papers
Buyer Obligations
Buyers should be aware that they are expected to produce 10% of the purchase price for their new home in New York when they sign the contract. This payment can be made via certified check, wire transfer, or personal check. If the buyer defaults on the contract, the seller can keep the buyer's earnest money and sue for monetary damages. Buyers can be found in default if they:
- Do not put the initial deposit (good faith deposit) into escrow on time
- Cancel the sale after removing all contingencies or without cause allowed by the contract
- Do not remove contingencies on time (or possibly ignore other deadlines)
- Do not have contractually required work completed (such as pest work or home inspection repairs)
- Do not keep the utilities on for inspections and final walkthroughs
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Contingencies
A default occurs when either the seller or the buyer fails to meet the terms of the contract and agreement. Usually, a default happens after all the contingencies have been removed from the contract. In the context of residential sales contracts in New York, here are some important considerations regarding contingencies:
Types of Contingencies
- Inspection Contingency: Buyers often include an inspection contingency, which allows them to conduct a thorough inspection of the property before finalising the contract. If issues are found during the inspection, the buyer can request the seller to make repairs or renegotiate the terms of the contract.
- Appraisal Contingency: This contingency protects the buyer by allowing them to back out of the contract if the appraised value of the home is less than the purchase price.
- Financing Contingency: This type of contingency is often included to ensure that the buyer can secure the necessary financing for the purchase. If the buyer is unable to obtain a mortgage on acceptable terms, they can cancel the contract without penalty.
- Mortgage Contingency: This contingency protects the buyer in case they are unable to obtain a mortgage. If the buyer cannot secure financing, they can end the contract without legal consequences.
- Title Contingency: This contingency allows the buyer to ensure that the property's title is clear of any liens or legal issues. If there are issues with the title, the buyer can choose to cancel the contract.
- Home Sale Contingency: In some cases, buyers may include a contingency that makes the purchase contingent on the sale of their current home. This protects the buyer from carrying two mortgages if their previous home doesn't sell in time.
Handling Contingencies
When including contingencies in a residential sales contract in New York, here are some important considerations:
- Deadlines and Timeframes: Any contingencies included in the contract should have clear deadlines. For example, there may be a deadline for completing inspections or securing financing. It's important for both parties to adhere to these timelines to avoid potential defaults.
- Negotiation and Amendments: If issues arise during the contingency period, it may be necessary to negotiate amendments to the contract. For example, if an inspection reveals problems with the property, the buyer can request repairs or a reduction in the purchase price.
- Removal of Contingencies: Once a contingency has been satisfied, it can be removed from the contract. However, this should be done carefully and with the guidance of a real estate professional or attorney. Removing contingencies prematurely can leave buyers vulnerable to losses if they need to back out of the contract later.
- Understanding Local Laws: It's important to note that laws and regulations regarding contingencies may vary by state and even by county. Familiarise yourself with the specific requirements and practices in New York to ensure compliance with local laws.
- Seek Professional Guidance: Working with experienced professionals, such as Realtors, attorneys, and lenders, is crucial when navigating contingencies in a residential sales contract. They can guide you through the process, ensuring that your interests are protected and that all necessary contingencies are included in the contract.
In summary, contingencies play a crucial role in residential sales contracts in New York by providing a safety net for both buyers and sellers. By understanding the types of contingencies available and effectively managing them throughout the contract period, both parties can protect themselves from potential defaults and ensure a smoother transaction.
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Damages and lawsuits
Defaulting on a residential sales contract in New York can have significant legal and financial consequences, including damages and lawsuits. Here's what you need to know about the damages and lawsuits that may arise from defaulting on a residential sales contract in New York:
Liquidated Damages
In New York, residential real estate contracts typically include a provision for "liquidated damages". This means that if the buyer defaults, the seller is entitled to keep the deposit as compensation. This is often referred to as "earnest money" and serves as a form of damages if the buyer breaches the contract and pulls out of the deal. The purpose of liquidated damages is to compensate the non-breaching party for their losses and put them in the same economic position as if the contract had been performed.
Specific Performance
While rare, a seller can also choose to sue for specific performance, which means forcing the buyer to complete the purchase as agreed upon in the contract. This option is not commonly used or granted by the courts. Similarly, a buyer can sue for specific performance if the seller defaults, forcing the completion of the sale.
Monetary Damages for Breach of Contract
In addition to liquidated damages, both buyers and sellers can sue for monetary damages resulting from a breach of contract. For example, if a buyer defaults on a home purchase and the seller is forced to sell the property for a lower price, they can sue the original buyer for the difference in the sale price. This type of damages aims to compensate the non-breaching party for their actual financial losses resulting from the breach.
Rescission and Notice Requirements
In certain circumstances, a buyer or seller may have the right to rescind the contract before the closing date. Rescission is a legal action that allows a party to terminate the contract and undo the transaction. In New York, specific notice requirements must be followed for a valid rescission, as outlined in Real Property Law § 265a. Failure to comply with these requirements can result in legal consequences and exposure to damages.
Legal Costs and Expert Witnesses
Breach of contract disputes can be complex and often involve legal costs and the engagement of expert witnesses. Early assessment of damages and retaining expert witnesses can be crucial in developing a winning legal strategy. It is important for both buyers and sellers to carefully evaluate their potential exposure to damages and seek legal counsel to navigate these complex issues effectively.
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Escrow and deposits
In New York, when an offer to purchase a home is accepted by the seller, the buyer is expected to produce 10% of the purchase price as a deposit for their new home. This payment can be made via certified check, wire transfer, or personal check to the seller's attorney or firm for deposit in an escrow account. During the escrow period, the buyer should line up any necessary mortgage financing, and their attorney will conduct a title search to ensure that no liens or other clouds are outstanding against the property.
Escrow accounts are a safeguard to maintain integrity in the home-buying process. They are typically managed by a neutral third-party entity, such as an attorney or title company representative, who holds the buyer's deposit and important documents related to the home sale. The funds and documents are only released from escrow after the closing, once both the buyer and seller have satisfactorily completed all mutually agreed-upon aspects of the sale.
If the buyer defaults on the contract, the seller may be entitled to keep the deposit as "liquidated damages", unless the contract contains contingencies that allow for cancellation without penalty. On the other hand, if the seller defaults, the buyer may have the option to sue for monetary damages, termination of the contract, and the return of their deposit.
It is important to note that the escrow process can vary depending on the specific terms of the escrow agreement. For example, if the buyer is unable to secure a mortgage or decides to back out of the deal, the seller may or may not be able to retain the earnest money in the escrow account, depending on the stipulations in the contract.
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Frequently asked questions
Defaulting on a residential sales contract occurs when either the seller or the buyer fails to meet the terms of the contract and agreement. Defaulting is not a crime, but it exposes the parties involved to significant legal and financial risks.
A seller could default on a residential sales contract by not providing the loan payoff information or any other required information in a timely manner, refusing to schedule or attend a sign-off to sign the closing papers, or not completing the sale due to not liking the bank's terms.
If the buyer defaults, the seller has the right to terminate the contract and keep the earnest money payment or down payment. The seller can also sue for monetary damages for breach of contract or sue for specific performance, i.e., force the buyer to complete the sale. If the seller defaults, the buyer can sue for monetary damages for breach of contract, termination of the contract and return of the deposit, and/or specific performance, i.e., forcing the completion of the sale.
