Navigating a Default in the Purchase Agreement

By MNR News posted 10-26-2022 09:03

In a perfect world, everyone would follow through on their word. Unfortunately, none of us—especially Realtors®—do business in such a world. Some transactions are considered so important, such as the transfer of real property, that we will not rely on someone’s word and require a written agreement; the purchase agreement (PA). 

But what do Realtors® do when a buyer or seller doesn’t follow through on what they agreed to in a PA? This undesirable situation is known as a default in the purchase agreement.

A default in a PA occurs when either the buyer or seller fails to fulfill the terms of the contract. The eighth edition of Black’s Law Dictionary defines a “default” as an “omission or failure to perform a legal contract or duty.” Default on a PA is a serious situation that can expose one or both parties to significant legal and financial risks. There are a variety of ways a default can occur. Examples include a buyer’s failure to timely remit their earnest money or a seller’s failure to fulfill a work order on the property.

The answer to what a Realtor® should do when a default occurs depends upon the specific situation with a client, because there are various reasons parties don’t get to the closing table. We’ve put together the best practices for addressing a seller and buyer default in residential transactions, and what you can do to reach the best outcome for all parties involved. 

Please note:
What’s included in this article should not be taken as legal advice. What follows is general information about the options brokers and agents have when a default occurs, from both buyer and seller perspectives. For more in-depth coverage of this topic, watch MNR SVP of Risk Management Susan Dioury’s Broker Broadcast: Default in a Purchase Agreement.

Voluntary Cancellation or Amendment is Always Best

Navigating a default in the PA is a difficult dance. The parties to a PA have the duty of good faith and fair dealing, so you should do everything in your power to encourage and help your clients fulfill the terms of the PA. When a default occurs, if you can work with your client and cooperate with the other party’s agent to reach a voluntary resolution, that’s always best for everyone.  

Leave Legal to the Lawyers

If the parties are unable to come to a voluntary resolution to correct the default, then Realtors® will need to refer their clients to legal counsel. An attorney can then help the client understand their legal rights and obligations under the contract they entered into and consider the pros and cons concerning how to proceed in resolving the dispute between the parties.

In the legal world, there are three main options when a default occurs: enforce the PA, amend the PA, or cancel it. While agents and brokers can draw up legal contracts and should know the terms of the PA, you cannot offer legal advice or even legal interpretation. This becomes an issue when trying to determine the who, what, when, and why of a default starts to feel like a detective story. Remember that Realtors® are neither sleuths nor lawyers by trade. So, if you reach a point in the dispute where either party is blaming the other or there’s confusion over what determines the actual default, it’s time to refer clients to their legal counsel. 

Statutory Cancellation

The Default section of the MNR PA specifies the actions a party may take when the other party defaults in the terms of the PA including initiating a statutory cancellation.

Under Minnesota law, pursuant to the Minn. Stat.§ 559.217, either the buyer or the seller have the right to initiate a statutory cancelation of a residential purchase agreement if a default occurs or an unfulfilled condition exists after the date specified for fulfillment. If the parties are unable to resolve the default or unfulfilled condition, and one party is refusing to sign a cancellation of PA, then the statutory cancellation might be the next best option. This provision is a much more efficient solution than obtaining a resolution at the district court level, which can take months. Within this statutory cancellation, there are two provisions or two kinds of cancellation, known either as a “Cancellation with Right to Cure” or a “Declaratory Cancellation”—we’ve detailed these provisions below.

Cancellation with Right to Cure — The “right to cure provision” cancels the PA within 15 days after service of notice unless the defaulting party complies with the conditions in default and completes the unfulfilled conditions. If there’s no language in the PA that cancels the PA by its own terms, then the buyer or seller can initiate the statutory cancellation with a right to cure. After 15 days if the defaulting party does not cure the problem or secure a court order suspending the cancellation, then the purchase agreement is cancelled, and the earnest money goes to the filing party.

Declaratory Cancellation — If there’s declaratory cancellation language in the PA—in other words, if there’s language in the purchase agreement that states the PA is automatically canceled—either party may initiate a declaratory cancellation under Minn. Stat. § 559.217, Subd. 4. 

Buyer Default

Under the Default section of the MNR PA, if the buyer defaults on any agreements, the seller has the right to cancel the PA and any payments may be retained by the seller as liquidated damages.

The seller could also choose to enforce the PA and seek specific damages related to breach or seek specific performance of the PA from the buyer. From a broker’s perspective, when a buyer defaults, it’s important to have the parties obtain a resolution so the broker can release the earnest money and, if there is to be a cancellation, there is clarity that the buyer’s equitable interest in the seller’s property is terminated. 

Seller Default

In the event of a seller default, the buyer can cancel the PA under Minnesota law, they may also be able to seek actual damages for the breach or sue for specific performance from a seller. Realtors® play a critical role in assisting their clients get to the closing table. However, when one party doesn’t keep their word, it’s important that Realtors® guide their clients through this important Default section of the PA and refer them to legal counsel when it becomes necessary.  

MNR Forms

Minnesota Realtors® provides up to date contracts and forms for members that will help you navigate the real estate transaction, including Purchase Agreements, Amendments to Purchase Agreements, and various Addenda to Purchase Agreements. You can access these forms and our Risk Management services here.