Seller is Refusing to Close Escrow? Know Your Options

Broker/Realtor, Contract Disputes, First Time Home Buyer, and Real Estate Law by Ashlee D. Gonzales, Esq.

If you’ve recently purchased a home, or are looking to buy, you know how tough the market is.  The competition is intense, with there being more buyers than sellers.  Finally, your offer on your “dream home” has been accepted. The paperwork is drafted and signed by both parties, life couldn’t be better. That is, until the closing date comes, and the seller refuses to close escrow. Now what? Don’t worry, as the buyer you have strong options. Here is an outline of the options a buyer has when the seller refuses close escrow:

Typically, sellers refuse to close escrow for one of two reasons. First, the market has fluctuated and they think they can get a higher price from a subsequent offer, so they refuse to close at the lower agreed upon price. Second, the seller has issues obtaining alternate housing, either due to lack of availability or a failed deal. Unless the buyer’s transaction with the seller is contingent on the seller obtaining alternate housing, which is rarely the case, the two reasons mentioned above do not relieve them of their duties to the buyer. A rise in the market value of the home or difficulty obtaining alternate housing is no excuse for the seller to fail to perform.

In the event that you are the buyer in this situation, there is relief for you. Most of the standard real estate purchase contract forms in California have a mandatory mediation provision, requiring the parties to mediate prior to initiating any court action.  However, there are several exceptions to this. One of those includes the filing of a lawsuit for the purpose of recording a lis pendens. The lis pendens provides prospective buyers and lenders with notice that you have a pending action with the seller (Cal. Civil Code § 405.20). This limits the seller’s ability to try and sell the property to someone else at a higher price. The recording of a lis pendens can be costly as the lawsuit must be drafted and filed concurrently with the recording.  The lis pendens provides a vital security measure, and may prevent an exorbitant amount of fees down the road when trying to obtain the property from a subsequent buyer. Well worth the up front cost when your dream home is at risk!

After the buyer files a lawsuit, the primary relief in these circumstances is called specific performance, and the relief acts just as it sounds. Specific performance is a legal remedy for breach of contract claims that require the seller to perform the contract, placing the buyer in a position they would have been in had the seller performed (Cal. Civil Code § 3384). The seller is then legally required to forfeit the property to the buyer. The courts in these cases grant specific performance instead of money damages due to the unique characteristics of real property, with money damages not adequately satisfying the buyer’s damages (Real Estate Analytics, LLC v. Vallas (2008) 160 Cal.App.4th 463).

Either during the pending lawsuit or as an alternative to it, the parties can participate in mediation. It is substantially less expensive than a trial or arbitration, and many parties come to an agreement and settle. The mediation process, however, can take weeks to coordinate, and there is no guarantee that the seller will agree to participate.  Even more detrimental to the buyer, most parties agree to bear their own fees and costs of the mediation so if the buyer has out of pocket costs caused by the seller’s breach, the buyer may be waiving those costs as part of the mediation.

In contrast, the initiation of a court action to record a lis pendens can occur quickly after the seller’s default, and can provide some security to the buyers while they coordinate and schedule the mediation. And, as the liability is usually clear when the seller fails to perform, the contract provides for attorney fees to be awarded to the prevailing party.  The procedures discussed above tend to be complex, and legal representation is encouraged. Becoming a homeowner is a major milestone in most people’s lives. Thankfully there are legal remedies to help buyers achieve this goal when they deal with unreasonable sellers.

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