The Seller Backed Out of Our Commercial Real Estate Deal. What Now?

First: did the seller actually breach?

Not every refusal to close is a breach. Commercial purchase agreements often give the seller rights that look like backing out but are not. Before deciding on a remedy, read the contract for:

• Conditions to the seller's obligation. Lender approval of a loan assumption, a tenant's estoppel, a partner's consent, or a 1031 exchange contingency. If a condition failed, the seller may be entitled to walk.
• Buyer defaults. A missed earnest money deposit, a late financing notice, or a failure to deliver closing documents on time can put the buyer in default first, which excuses the seller.
• Title and survey objections. If the buyer objected and the seller elected not to cure, many contracts let either side terminate.
• Cure periods. A notice of default and a chance to cure may be required before the seller is in breach.
• Remedies clauses. Some contracts limit the buyer's remedy to a refund of earnest money, or to a refund plus a capped reimbursement of costs, and exclude specific performance. Others preserve specific performance expressly.

A seller who simply received a higher offer, changed its mind, or decided to hold the property has no excuse in any of those clauses, and that is the usual fact pattern when a seller backs out.

Is the contract enforceable at all?

Under Business and Commerce Code § 26.01(b)(4), a contract for the sale of real estate is not enforceable unless it, or a memorandum of it, is in writing and signed by the party to be charged. The writing must identify the property with reasonable certainty and state the essential terms. A letter of intent that says it is non-binding, an email chain that never settled the price or the closing date, or a contract signed by the buyer but not the seller usually fails this test. The details are in why real estate deals must be in writing in Texas. If the writing is sufficient and signed, the seller is bound.

Remedy one: make the seller sell

Texas courts treat land as unique, so a buyer whose seller refuses to convey can ask for specific performance: a judgment ordering the seller to sign the deed on payment of the price. The remedy is equitable and discretionary, and the buyer must prove it was ready, willing and able to perform its own side of the contract at the time performance was due. The Texas Supreme Court made that an essential element in DiGiuseppe v. Lawler (2008), holding that a buyer must prove it even when the seller's breach excused a formal tender of the price. In practice that means the buyer must show it had the funds or a committed lender and was prepared to close. The elements, proof and limits are covered in forcing a real estate sale to close through specific performance.

Specific performance fits a buyer who wants this property: a site assembled for development, a building the buyer's business will occupy, or an asset with no substitute. It does not fit a buyer who has moved on, and it is not available if the contract excludes it or if the seller has already conveyed to a good-faith purchaser.

Remedy two: damages

A buyer who does not want the property, or cannot get it, can sue for breach of contract. The usual measure of expectancy damages is the difference between the contract price and the market value of the property at the time of the breach. If the property was worth more than the price, the buyer lost that bargain and may recover it. If the property was worth about the contract price, expectancy damages are small, and the buyer's recovery is mainly its reliance costs: inspection and environmental reports, survey, appraisal, loan commitment fees, legal fees for the contract, and similar out-of-pocket expenses. Lost profits from a planned development or resale are recoverable only if they were foreseeable and can be proven with reasonable certainty, which is a high bar for an unbuilt project. What a business can and cannot recover in a contract case generally is explained in what damages a business can recover for breach of contract.

Attorney's fees are recoverable under the contract if it says so, and otherwise may be available under Chapter 38 of the Civil Practice and Remedies Code on a claim for breach of a written contract against an individual or organization.

Remedy three: terminate and take the earnest money

Nearly every contract lets a buyer whose seller defaults terminate and receive the earnest money back. That is the fastest, cheapest outcome and the right one when the buyer has a substitute property. The escrow agent will generally release the deposit only on a written release signed by both parties or a court order, so a seller who refuses to sign can force a small lawsuit even over a refund. Some contracts add that the seller must reimburse the buyer's due-diligence costs up to a stated cap when the buyer terminates for the seller's default.

Protecting the property while the case is pending: lis pendens

A seller who backs out often has another buyer waiting. A buyer who sues for specific performance, or otherwise asserts an interest in the title, may record a notice of lis pendens in the county property records. The notice does not stop a sale, but it tells any later purchaser or lender that the title is in litigation, which in practice makes the property unsaleable and unfinanceable until the case ends. The notice is proper only when the suit actually seeks title or an interest in the property; a suit for money damages alone does not support one, and a wrongful lis pendens can be expunged and can expose the filer to liability. The rules and the removal procedure are in lis pendens in Texas.

Example

Suppose a Frisco investor contracts to buy a 24,000-square-foot retail strip for $7.2 million, with a 45-day feasibility period, a $150,000 earnest money deposit that becomes non-refundable after feasibility, and closing 30 days later. The buyer waives feasibility, deposits the additional earnest money and obtains a loan commitment. Two weeks before closing the seller's broker emails that the seller has decided to retain the property and will refund the deposit. The contract preserves specific performance and awards fees to the prevailing party. The buyer's counsel sends a letter tendering performance and stating the buyer will appear at the title company on the closing date with funds. The seller does not appear. The buyer files suit in Collin County district court for specific performance and, in the alternative, damages, and records a lis pendens the same day. The appraisal supporting the loan valued the property at $7.9 million, so the expectancy damages claim is about $700,000 plus costs. With the lis pendens blocking the competing sale, the seller agrees within 60 days to close at the contract price and pay part of the buyer's fees. The buyer's documented readiness to close was what made both remedies credible.

Deadlines

A suit for specific performance of a contract for the conveyance of real property must be filed within four years after the cause of action accrues under Civil Practice and Remedies Code § 16.004(a)(1), and a damages claim for breach of the written contract has the same four-year period. Practically, the specific performance claim should be filed much sooner, because a court weighing an equitable remedy will ask why the buyer waited, and because the seller may sell to someone else in the meantime.

Steps a buyer can take now

1. Preserve the contract, every amendment, the earnest money receipts, the title commitment, the loan commitment and all emails and texts with the seller and brokers.
2. Do not accept a refund or sign a release until the remedy decision is made. Cashing the earnest money check can be argued as an election to terminate.
3. Send a written tender: confirm the buyer is ready to close on the contract date, with proof of funds, and ask the seller to confirm it will perform.
4. Appear at the scheduled closing, or document that the seller has stated it will not.
5. Have a litigator review the remedies clause and the readiness evidence before filing, and record the lis pendens only with a suit that supports it.

Tina Wysk represents buyers and sellers in failed commercial real estate closings in Dallas-Fort Worth, including specific performance suits, damages claims and earnest money disputes. The firm's real estate litigation practice covers purchase contract disputes from the first demand through trial.