The Deal Went South – What Do We Do Before Selling to Buyer No. 2?
A transaction can collapse for any number of reasons. Getting a release is ideal because it makes clear that the transaction is over. Dead. Done.
A release represents a resolution and it’s not always possible to secure an agreed upon resolution. Suppose the Buyer fails to make a substantial deposit when due and the Seller seeks to terminate, perhaps because there’s a better Buyer waiting in the wings. Maybe Buyer 1 will say “what the heck,” walk away and look for something else. It’s also possible that Buyer 1 will claim that the failure to pay a deposit when due is de minimus, and therefore not a breach of the agreement. If this Buyer records a lis pendens then a sale to Buyer 2 will not take place!
One cannot predict whether a Buyer will pursue a seller terminated agreement of sale. If the seller has to sell the property (for any number of reasons including the need for settlement proceeds in order to buy the next property), what does he do? It is not a violation of law to put the property back on the market for sale without a release from Buyer. The big question is whether he can accept a second agreement of sale in the absence of a release from Buyer 1?
First, Seller (and his listing agent) should assure that Buyer 2 is aware of the prior transaction and of the fact that no release has been secured. Amending the Seller Disclosure is critical. A Seller should presume that in the absence of a release, there is potential litigation on the horizon.
Second, the agreement of sale to Buyer 2 should provide an out for Seller in the event that Buyer 1 asserts a claim, including a lis pendens. The language should provide that such an assertion by Buyer No. 1 terminates the agreement to Buyer No. 2 who will be restored to his/her deposit money and perhaps other sums incurred in acquiring inspections, etc. Will Buyer 2 enter an agreement of sale that includes such language? Buyers seem to be willing to do most anything to acquire a property in this market, I would assume so. I’d also assume that prospective Buyers would question the facts of the termination and assess the likelihood that Buyer 1 will make a claim. The question is not answered in the abstract but based on actual facts. Why did the Seller declare that Buyer 1 was in default? Has Buyer 1 hired a lawyer or notified the Seller of an impending suit? Usually, we have insight as to whether a terminated transaction, one where there is no release, will rear up or die peacefully.
In many cases, terminations are based on specific language in a contract. For example, if the agreement is contingent on mortgage financing and the Buyer doesn’t have their mortgage funds by settlement, the contract is terminated. The contract makes clear that the Buyer is to be restored to his/her deposit money and the contract is over. Why then, should a seller need a release or reveal to Buyer 2 that there was a prior agreement of sale? While the failure to acquire the mortgage by settlement is a clear basis for termination, are we certain that the Buyer will agree or will the Buyer have some factual or legal basis for claiming that the contract is not terminated. Lis pendens are sometimes filed by Buyers who have no basis and while a baseless lis pendens can bring bad faith claim against the Buyer, it will surely preclude a prompt sale to Buyer 2. Again, placing language in the agreement with Buyer 2 identifying a terminated agreement protects seller should Buyer No. 1 assert a claim. It also protects Buyer 2 who now has the opportunity to assess the risk that her transaction will be derailed by an unhappy Buyer 1.