Can I Back Out of a Real Estate Contract, and What Are the Potential Consequences?
Buying real estate can be a good, revenue generating, investment.
But what happens if, after you sign on the dotted line, doubts creep in and you change your mind and you want to back out of the deal?
Is it even possible? What are the legal implications?
Can I Back Out of a Real Estate Contract?
As is usually the case, the answer is it depends on the context and the contract.
Can a Seller Cancel a Contract?
It is more difficult for the seller to get out of a signed contract than the buyer because if the buyer has competent counsel, their lawyer will include provisions which allow the buyer to terminate the agreement under certain circumstances related to due diligence and financing.
A seller is usually obligated to sell per the signed contract unless buyer fails to make or is unable or perceived to be unable to make a payment of a required deposit or the balance of the purchase price at closing.
A seller who wants to back out of the deal for reasons such as a better buyer came along or because they now believe the price they accepted is too low, will have to be lucky (e.g., buyer fails to make a payment) or savvy enough to create an escape hatch out of a buyer weakness such as lack of authority, conflict, or a material adverse change to buyer’s financial circumstances.
The Potential Consequences for a Seller Backing Out of a Sale
If a seller attempts to back out of a signed real estate contract, the buyer may resist. The buyer may sue to recover any costs the buyer had to pay in connection with the transaction or to force the transfer of the property.
Can a Buyer Cancel a Contract?
A buyer can also back out of a contract as long as they have “baked” “outs” into the contract that apply under the circumstances such as the right to terminate if they are not satisfied with the physical condition of the property, or the state of title, or if buyer is unable to obtain financing consistent with the terms of the contract.
The Potential Consequences of Buyer Backing Out of a Purchase
If a buyer attempts to back out of a signed real estate contract, the seller may resist. The seller may refuse to return buyer’s earnest money deposit, which may be a significant amount, or sue buyer to recover losses incurred by taking the property off the market or any costs the seller had to pay in connection with the transaction, or to force the buyer to purchase the property.
Additionally, either buyer or seller may attempt to back out of the deal claiming that the other made a representation that isn’t true or a promise they did not keep. These efforts, though, are even more likely to meet with resistance and may evolve into a costly and time consuming dispute.
Should I Have a Real Estate Lawyer?
Having an experienced commercial real estate attorney by your side from before you sign the contract through closing is definitely a good idea, even if you do not decide to back out of the contract. Having a lawyer who can translate the legalese so you can make informed decisions, and advocate your legal interest so you can focus on business provides peace of mind and the confidence you need to succeed in accomplishing your business goals.
Díaz and the LareDiaz team will help you navigate your commercial real estate journey without getting blindsided. Díaz has over 25 years of experience in commercial real estate and finance business law, and empowering clients to achieve their business goals. Call 267.675.7060 to schedule a free consultation.