Can a Seller Back Out of a Signed Contract?

Disclaimer: This article is meant to be used as a helpful guide. It is not to be taken as legal advice. If you need legal help with a real estate contract, please contact a local skilled and licensed real estate attorney.

Introduction

When selling or purchasing a home, both buyers and sellers expect a smooth and successful transaction. However, there are a few instances where sellers may decide to back out of the agreement, leaving buyers in a challenging position. Backing out of a signed contract is easier said than done for a seller.

Understanding Seller's Rights

Once a valid contract is signed, it is considered legally binding.
A valid contract must have: a mutually agreed offer and acceptance of the offer; consideration (in our case, a promise to pay $ in exchange for a thing of value: house); capacity (the parties must be capable of performing their respective parts); and legality (the agreed actions must not be illegal).

Though a contract to buy/sell a house is legally binding, a seller may be able to back out with few or no consequences, but only if very specific conditions are met:

1. Contingencies: Contracts often include written in contingencies allowing either party to terminate the agreement under specific conditions. Examples include inspection or appraisal contingencies, or the failure to meet certain deadlines. If specific contingencies in the contract are not met, such as the seller's inability to find a new home within a specified timeframe, they may also have the right to terminate the agreement.
2. Attorney Review: Some states require an attorney review period, during which the buyer or seller can back out of a signed agreement. Usually a few days long, the period gives either party the chance to back out of the contract because their lawyer notices a problem. Some real estate contracts also include a “time is of the essence” provision, which stipulates both parties are expected to fulfill the contract within an appropriate amount of time.
3. Breach of Contract: If the buyer fails to fulfill obligations outlined in the contract, the seller may have the right to terminate the agreement. This includes a buyer not complying with terms, failing to correct the breach within the cure period, or failing to secure financing.
4. Mutual Agreement: Both parties can agree to mutually terminate the contract by signing a release or cancellation agreement, regardless of the reason.
5. Fraud or Misrepresentation: Sellers may be able to back out if the buyer engaged in fraudulent activities or provided false information that materially affects the transaction. This also includes predatory buyers who take advantage of inexperienced sellers. In extreme cases, the seller might have grounds to back out of a contract if they’ve been swindled, or agreed to sell the house for an incredibly low price.

Consequences for Buyers

A sympathetic buyer who understands the seller’s situation may be willing to let the seller out of the deal without penalty. However, there are several consequences that can impact the buyer when a seller backs out:

1. Legal Recourse: Buyers may have legal options to seek remedies, such as filing a lawsuit to enforce the contract or pursuing monetary damages.
2. Financial Losses: Buyers may lose money spent on inspections, appraisals, or other costs associated with the purchase that cannot be recovered. If the buyer had to pass on other properties or opportunities during the initial purchase, they may miss out on those alternatives when the contract is broken. These can be a significant source of stress and disappointment.
3. Delayed Timeline: The buyer's home buying process may experience significant delays, resulting in a new property search or renegotiation of financing terms.
4. Mediation: In some states, if the buyer and seller can’t reach an agreement around termination of a contract, they’re typically required to attend mediation sessions before heading to the arbitration courtroom. This could resolve the dispute with less legal fees than court, but will also draw out the process.

Consequences for Sellers

1. Suit for specific performance: The buyer may sue the seller in hopes of obtaining a court order requiring the seller, as a breaching party, to go forward with the agreement and complete the sale. If such an award is granted, the seller would be paid as agreed and title transferred to the buyer, even against the seller’s wishes. This legal process can come with massive legal expenses and potential consequences for the seller.
2. Damages: A buyer who feels subjected to unreasonable and unwarranted expenses as a result of a seller backing out of a contract may also sue for damages. Monetary damages may be awarded for a number of commonly incurred costs including, but not limited to, storage costs, temporary housing costs, lost deposits, legal fees, and more.
3. Listing Agent Sues for Compensation: If a seller hired a listing agent and suddenly or unexpectedly backs out of a contract, the listing agent may have grounds to sue for lost commissions, marketing fees, or other expenses related to the failed sale.

Seek Professional Advice

Buyers should consult with a real estate attorney to understand their rights and options, which are specific to the locale and the contents of the contract.