Author Archives: Victoria Edwards

The buyer’s remedy when the seller cannot convey good title

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What can a buyer do when the seller cannot convey good and marketable title as promised in the Agreement of Sale?

Paragraph 17(G) of the Agreement of Sale provides that if the seller is unable to give good and marketable title to the property, the buyer will be entitled to elect from the following remedies: 1) take such title as the seller can provide or 2) seek reimbursement of the deposit and “any costs incurred by buyer for any inspections or certifications obtained according to the terms of this agreement.”

While the buyer is given two remedies, the buyer also loses another remedy that, but for this language, would be available under Pennsylvania law. Generally, in Pennsylvania, a party who is aggrieved by another’s breach of a contract is entitled to sue for the actual damages sustained. In the case of a buyer who has lost the ability to purchase the property because of a title issue, the losses will usually exceed the deposit paid by the buyer. The return of the deposit only makes the buyer whole. The buyer gains nothing more by being reimbursed several out-of-pocket expenses.

The damages a buyer might actually suffer can be far greater. Imagine the buyer who seeks to purchase undeveloped land for the construction of a hotel, a mall or even a home that is likely to benefit from appreciation that outperforms the general market. These losses are “consequential damages” and they represent the profits that may have been seen down the road, but which are lost due to the title problem.

Why do we, in our Agreement of Sale, take away the common law remedy to seek damages that the law would otherwise provide? Generally, title issues are not malicious or intended breaches by sellers. Title problems are insidious and usually uncovered as the result of a title search. In these cases we seek not to punish the seller or even impose the hardship for covering buyer’s losses.

This limitation of the remedies available to a buyer when a seller cannot provide a title are time-worn; as currently written, they have appeared in Agreements of Sale for well over a decade. We seem to live with this remedy quite easily. With respect to commercial agreements, drafted by lawyers, other provisions may be negotiated as may fit the case.

Further, it is always possible to discover a title problem within days of execution of the Agreement of Sale, if not before.  While it is not the practice to do a title search before signing an agreement, it should be the practice to do one as soon as reasonably practicable after the execution of the agreement. In this way a buyer can cut bait and run rather than wait weeks or months before finding out that his aspirations to acquire the property have been dashed.

So, we understand why our agreement includes a limitation of the damages available to a buyer when a seller defaults with respect to the conveyance of title. But that is not the end of the story.  In some cases, the buyer is freed from the bounds of this limited remedy and may pursue the larger consequential damages that he or she may have suffered. Why and when does this occur?

As noted, Paragraph 17(G) provides an election of remedies. In many cases, the first option, take what title the seller can provide, may not be available. What if the title flaw is that the seller doesn’t own the property, or what if there is recorded right-of-first-refusal that is exercised by the owner of that right? In these situations, there is no title for the buyer to acquire, so it would seem that the buyer is left to the second available option, take back the deposit and get reimbursed for inspections and certifications.

Our courts have ruled that when a contract provides for an election of remedies, and one of the options is not available, then the entire clause fails and the buyer may seek what damages the law would otherwise allow.  More plainly put, if the seller can’t give title, the buyer has a right to sue for whatever losses he or she can prove and is not merely stuck with a reimbursement of the deposit and those few costs.

In light of the issues discussed in this article, what is the agent’s best practice? The average agent should encourage her client to get a title search soon after entering into the agreement of sale. By conducting the title search early in the process a buyer can avoid expenses incurred in the anticipation of purchase such as architect or surveyor fees. The agent should also recommend that the client seek the advice of an attorney once a title defect is discovered so that the buyer is fully informed as to what remedies are available to them.

This article was co-authored by James Goldsmith, Esquire. 

The enforceability of liquidated damages

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Is the liquidated damages clause in the Agreement of Sale enforceable?

To be clear, the liquidated damage clause at issue in this article is the liquidated damage clause found in paragraph 26(G) of the Agreement of Sale.  The answer is, as is so commonly the case in questions of the law, it depends.

Pennsylvania courts have decided that when a liquidated damage clause is tantamount to a penalty, the clause is unenforceable.  In order to be enforced, the liquidated damage must be a reasonable forecast of the potential harm to the non-breaching party.  The benefit of having a liquidated damages clause is that it should limit litigation over damages and allows the parties a degree of certainty when entering into the contract. While courts strive to enforce the intent of the parties to these contracts for that very reason, courts will not enforce a clause that amounts to a penalty and is essentially unfair to one side.

Courts that have reviewed liquidated damages clauses have applied a five-part test to determine if the liquidated damages are in fact a penalty and therefore, unenforceable.

The courts look at:

  1. the language of the contract
  2. the intentions of the parties
  3. the subject of the contract and its surroundings
  4. the ease or difficulty in measuring the amount of damages
  5. the sum stipulated.

It is unlikely that your average residential buyer or seller considers all of these elements when entering into the Agreement of Sale.  Fortunately, courts that have ruled on the enforceability of the liquidated damages, in the real estate setting, have primarily focused on the ratio between the liquidated damage and the amount of the deposit being held as the liquidated damage.  Specifically, in real estate transactions, courts have held that where the liquidated damage is equal to between 9 to 11 percent of the purchase price the liquidated damage is a reasonable forecast of the potential harm and is enforceable. On the other hand, a court held that a liquidated damage that amounted to 60 percent of the purchase price was not reasonable and was found to amount to a penalty and was unenforceable.

The court has stated that real estate transactions are within the class of cases where the amount of damages for a breach in performance is difficult to determine. It is for that very reason, that Agreements of Sale for real estate include liquidated damages clauses to cover a buyer’s breach.  In the current real estate market, the amount of the deposit paid by buyer may be insufficient to cover the actual damages incurred. Frequently deposits of $500.00 to $2,500.00 are tendered as deposit money, regardless of the purchase price of the property.

Although Pennsylvania Courts have not considered the question of an insufficient liquidated damage, courts in other states have found that in the absence of fraud, duress or unconscionability, liquidated damages provisions are not subject to challenge based on the allegation that the liquidated damage is inadequate to compensate for the damages actually incurred.  The lesson here is that if you anticipate substantial damages, then you might negotiate for a deposit that ranges between 9 to 11 percent of the purchase price.

In the alternative, and rather than accept an insufficient deposit that is the limit of seller’s recovery, remove the check-mark that makes the deposit a liquidated damage.  In that way, a seller may endeavor to recover actual loses in the event of the buyer’s default.

This article was co-authored by James Goldsmith, Esquire.