The Consequences of Walking Away: Breach of Contract in Commercial Real Estate
The temptation happens often: the deal is done, the ink is dry, the contract is finalized…then someone gets cold feet. Buyers don’t want to buy, sellers don’t want to sell, money gets tight, titles can’t be delivered, etc. What makes breach of commercial real estate contracts unique as opposed to most non-real estate contracts is that every single property is unique. No two properties can share the same physical location, but most also won’t share the same size, improvements, buildings, access, resources…the list is endless. It’s not as though the buyer can just buy the same property from another seller, and the seller who loses a buyer also loses expected capital. When one party breaches its duties in a commercial real estate contract, it’s important for the non-breaching party to understand what remedies are available. We’ll explore the most common remedies and what provisions should be in commercial real estate contracts to mitigate the effects of breach.
There are two main categories of remedies – legal remedies, which provide monetary remedies and equitable remedies, which do not. The main type of equitable remedy applicable in a real estate contract context is specific performance. Since each property is unique, the argument goes, the only way to make a party whole is to fulfill the terms of the contract. This is done by asking for specific performance, a court-ordered fulfillment of the terms of the contract. It is as simple as the name implies; the court orders the party in breach to perform a specific act: for example, the act of signing or delivering a deed. This remedy generally only applies as against a seller in breach, and this makes sense: there is exactly one property with these characteristics in existence in the known universe, so the buyer has a strong argument that he or she cannot be made whole by mere monetary damages. Courts are generally loathe to force a party to perform an action unless monetary damages are incapable of providing relief. Sellers really only receive money in the transaction, so money is an appropriate remedy.
Damages, on the other hand, are monetary remedies available to both the buyer and the seller. Actual damages for both parties are usually given as the difference between the value of the property and the agreed-upon purchase price. The seller opposing a buyer in breach will want to argue the purchase price was more than the value of the property, while the buyer opposing the seller in breach will argue the opposite. These damages are often highly dependent on the commercial real estate market at the time, giving one party an advantage. The buyer is also generally able to terminate the contract if the seller is in breach and recover any payments made. Other types of damages may be available to a buyer in a commercial real estate transaction – courts in other states have found lost profit damages for a seller’s breach of a commercial real estate purchase contract.
As seen above, buyers tend to have more remedies than sellers, so savvy sellers should include contract provisions that deter breach on the buyer’s part. One of those provisions provide for liquidated damages. Liquidated damages are a fixed sum of money available to a seller in the event of a buyer’s breach. As mentioned earlier, actual damages can be dependent on the market and other factors, so a contract clause awarding liquidated damages in the event of a breach gives a seller some firepower in holding a buyer to the deal.
One other contract provision to consider is the award of attorneys’ fees in case of breach. Both parties should watch the language of any attorneys’ fees provisions inserted into the contract, making sure that the clause includes the word “reasonable.” Otherwise, the other side could run up extensive attorneys’ fees that wind up being almost punitive.