A real estate contract contains terms and conditions that are essential to the agreement. A breach of contract occurs when a party to the contract fails to perform any of the contract’s terms. Some common breaches are:
- failing to pay on time (ex. failing to close escrow in the time specified),
- failing to deliver the deed of property in the correct way, and
- unauthorized subleasing of a property in either residential or commercial leases.
The statute of limitation in New Jersey for breach of a real estate contract is 6 years. Lawsuits to recover real property have a 10-year statute of limitations.
To establish a breach of contract in a real estate case, a plaintiff must show that
- the parties entered into a written contract containing specific terms,
- the plaintiff performed as required under the contract,
- the defendant breached the contract by failing to perform one or more terms, and
- the breach caused the plaintiff to suffer a loss.
Material or Non-Material
Remedies available to the non-breaching party will depend on whether the breach was minor or material. A breach is material if the breaching party’s actions, or failure to act, substantially impacts the non-breaching party and results in the non-breaching party not getting the result they negotiated for. A breach is minor or non-material if a breaching party violates a more minor or vague condition of the contract.
The distinction between a material breach and a non-material breach is important because the remedies available vary significantly. When a material breach occurs, the non-breaching party could choose not to perform their responsibilities under the contract. Additionally, the non-breaching party will have the option to bring a lawsuit against the breaching party for monetary damages and in some circumstances seek specific performance. Whereas in a non-material breach, the non-breaching party may be entitled to compensation if they can prove that they suffered damages as a result of the breach. Typically, under contract law, when a party materially breaches the contract, the law requires the breaching party to pay monetary damages and does not usually force the party to take a specific action. However, there are circumstances where money damages would be insufficient to remedy the breach. Here, the court could order the breaching party to fulfill their obligations under the contract. For example, this could include transferring ownership of the property to the non-breaching party. This is known as specific performance.
Seller’s Remedies When a Buyer Breaches Real Estate Contract
The most prevailing material breach by buyers is not following through with a closing and not actually paying for and taking possession of the property as agreed to in the contract. When a buyer breaches the contract, the seller is entitled to monetary damages. While less common, the court may order specific performance if the situational calls for it. The amount of permitted damages resulting from breach of real estate contracts in New Jersey was defined in Kuhn v. Spatial Design, Inc., 245 N.J. Super 378 (App. Div. 1991). The court found that where a real estate contract is breached by the buyer, the seller may recover the difference between the contract price and the fair market value of the property at the time of the breach. Additionally, the seller can recover any incidental and consequential damages.
Note, in Farnella v. Brana, A-1712-06T1, 2007 WL 2827554 (N.J. Super. Ct. App. Div. Oct. 2, 2007), the Appellate Division allowed a seller to recover a damage award consisting of mortgage payments, real estate taxes, and insurance payments that a seller paid from the time of the breach until the property was resold.
Buyer’s Remedies When a Seller Breaches Real Estate Contract
A seller may be in breach of contract if a seller refuses to close on a property after signing a real estate contract, either because they changed their mind or they received a better offer from someone else. Here, courts tend to order specific performance making a seller sell their property to the buyer, since it could be difficult for a buyer to find a replacement property. However, a buyer is also permitted to monetary damages such as, the price they actually paid for the property, title and escrow expenses, the difference between the price agreed on and the value of the property at the time of breach, expenses in preparing to move into the property, and other significant damages and interests.