Out of Contract

I am the listing broker for a transaction set to close tomorrow. My seller and I have just learned that the buyer’s lender will not fund tomorrow. The buyer needs a three-day extension. All of the contingency deadlines in the contract have passed so that there is no longer any contingency excusing the buyer from closing. On the one hand, my seller will be substantially hurt by this delay. She needs the funds from the sale to purchase her replacement home. Her interest rate lock for her replacement home purchase will expire because of the delay. Yet she feels as though she has no choice but to hang in there with this buyer, even though there is no guarantee that the buyer will be able to close in three days. She was grateful that her property finally sold and does not look forward to putting the house back on the market.

Since my seller still wants to sell to these buyers, and since we will be “out of contract” after tomorrow, should I prepare an extension for all parties to sign?

Not necessarily. The real estate industry seems to use the term “out of contract” for two different types of situations, one where the use is appropriate, one where the use is misleading.

In one situation, a party has exercised its right under a contingency to terminate the contract. As an example, because the property did not appraise for the purchase price, the buyer might use the appraisal contingency to terminate the contract. When a termination occurs, the contract essentially disappears (subject to a few exceptions addressing post termination clean up details: the return of earnest money, the buyer’s obligation to protect the seller from damage that occurred to the property during any inspection, and the obligation to mediate any disputes). While it is more precise to say that the contract has terminated, it is not misleading to say that the parties are “out of contract.

Yet the industry also seems to use the term “out of contract” for the situation described in the question above: where one side has breached the contract. When one side (the buyer in the question above) cannot close, and there is no contingency excusing the defaulting side, the defaulting party is in breach of the contract and the non-defaulting party may chose to enforce her default remedies against the defaulting party. In these situations, it is misleading to say that the parties are “out of contract.” While the buyer in the question has lost the ability to enforce the contract against the seller, the seller may still enforce her remedies against the buyer. For the seller, the parties are still “in contract.” Depending upon how the boxes are checked in the remedies section of the contract, the seller may be able to obtain the buyer’s earnest money, or pursue the buyer for specific performance, damages or both.

Though the buyer’s delay may not be any fault of the buyer, one purpose of a contract is to assign risk for events which are not the fault of either party. If all of the deadlines for the buyer contingencies in the contract have passed, the Real Estate Commission approved form puts the risk of loss on a buyer for lender delay.

If the seller grants a simple extension in the example above, then the extension avoids the breach by the buyer, and the seller has given up her recourse against the buyer for the seller’s damages. If the seller has no intentions of trying to put some of the seller’s losses on the buyer, then the seller isn’t giving up much by granting an extension. But if the seller wants the buyer to share in some of her damages, or if the seller wants some other change to the deal, then the seller needs something other than a simple extension.

For example, the seller can refrain from granting the extension until the seller receives information sufficient to give the seller comfort that the buyer actually can close. The seller might not grant the extension until the actual closing-after the funds from the buyer’s lender have arrived. The seller could also ask for additional consideration in exchange for the extension period. For example, the seller could insist on having the buyer ante up all of the buyer’s down payment as earnest money. The seller could further insist that, in exchange for granting the extension, the buyer authorize the release of the earnest money to the seller. In the example above, the seller needs to close on the sale of her home, but she does not need the extension-the buyer needs the extension.

In situations where the seller seeks and buyer both seek to extend, and neither side perceives that it is damaged by delay, then the brokers should have the parties sign an extension. In situations, however, where the non-breaching party perceives that it is damaged by delay, sometimes an extension is exactly contrary to the non-breaching party’s intent. In those situations, the broker should advise the non-breaching party to seek legal counsel before the non-breaching party gives up important legal rights against the breaching party.

The mere fact that the parties passed the closing date without a closing does not mean that the contract is dead. If the parties have passed the closing date because, for example, the buyer has breached the contract, then the contract is very much alive for the seller who can enforce the seller’s default remedies against the buyer.

Jon Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate,Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. Contact Jon Goodman.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

JONATHAN A. GOODMAN