Specific Performance: A powerful remedy for the breach of real estate contracts
What is Specific Performance?
Specific performance is a powerful legal remedy in real estate disputes. It exists in cases involving a contract. When granted, the result is that the court orders a party to perform its obligations under the contract. The most common situation where the remedy of specific performance is allowed is when a seller of real estate fails or refuses to complete the sale. The buyer can sue and seek a court order requiring the seller to complete the sale.
The remedy of specific performance includes the court’s ability to additionally order the seller to pay the buyer damages incidental to the seller’s breach, such as damages to compensate the buyer for the seller’s delay in completing the sale. While specific performance actions by buyers are the most common, the remedy is also available to a seller when a buyer fails or refuses to complete the purchase.
Specific performance applies to more than sales contracts. It can be used to enforce lease obligations as well as options and rights of first refusal concerning sales and leases. In general, courts will not grant the remedy of specific performance in contracts for the sale of personal property. The justification is that most articles of personal property can be compensated for by an award of money damages. If, however, the articles of personal property are rare, have sentimental value, or of such quality that money damages would not be an adequate remedy, courts have granted specific performance.
Specific performance is an “equitable remedy.” Subject to certain exceptions, this means that actions for specific performance are usually decided by a judge sitting without a jury. This often results in the case going to trial faster and the trial lasting a shorter time than a jury trial.
When to Use Specific Performance?
A Seller’s Breach: Assume a purchase contract states a $5 million sales price and the buyer receives loan approval with 4% interest rate or other favorable loan terms that the buyer cannot obtain from another lender. Further assume that after the buyer receives loan approval that interest rates go up. If the seller decides to back out of the sales contract (typically because the seller receives a higher offer), the buyer has two choices: (1) accept the seller’s cancellation of the sale and look for a replacement property (and consider suing the seller for breach of contract seeking only money damages); or (2) sue the seller for specific performance to require the seller to complete the sale and for any incidental money damages caused by the seller’s delay. In situations where the buyer’s needs are best satisfied by purchasing a specific piece of real property, or the buyer would incur much more interest by having to purchase a different property, specific performance would be the preferred remedy.
The Practical Aspects of Successfully Obtaining Specific Performance
Specific performance is an equitable remedy where the courts take delays into account. The chances of obtaining the remedy of specific performance depend upon filing the lawsuit as soon as possible.
Before suing, it is necessary to establish a clear breach. This requires putting the party refusing to complete the sale on clear written notice of its breach and giving the breaching party a reasonable time to perform. If the party fails or refuses, the lawsuit should be filed right away along with motions seeking interim orders to preserve the status quo.
To prevent a seller from conveying the property to someone else, a buyer should immediately record a lies pendents (also called a Notice of Pending Action) in the county land records. A lies pendents notifies all persons dealing with the property that the seller’s title to the property is the subject of pending litigation. The practical effect of a lies pendents is that it prevents the seller from selling the property to someone else. This is because institutional lenders will generally not loan money to a new buyer if a lies pendents has been recorded. Similarly, title insurance companies will generally not insure the new buyer’s title.
In California, specific performance actions are governed by statutes. There are various requirements, such as an enforceable contract and other essential elements that a plaintiff must plead and prove. Before threatening to sue for specific performance, a legal opinion on the viability of the remedy in any given situation should be obtained.
Our Experience
Our firm has many years of experience handling specific performance actions. Protracted and expensive litigation is the last thing parties want to see happen in the midst of trying to close a real estate deal. Fortunately, litigation is by no means the only solution. We have experience combining the prospect of litigation with negotiations to solve these disputes before litigation or early in the case. If you are in a situation where a party is refusing to perform its contract, feel free to contact us.