A real estate contract is a legally binding agreement relating to the sale, purchase, or rental of real property. Real property is fixed property.  The property may be residential, such as a home, or the property may be commercial, such as an office building. Under a real estate contract, if a party does not comply with one or more of the terms of the agreement, the other party may be awarded money damages by a court. Money damages award a party for financial losses they sustained because of the breach.

Who are the Parties to a Real Estate Contract?

In a real estate contract for the purchase or sale of land, the party wanting to sell the property is known as the seller, and the party wanting to purchase the land is known as the buyer. In a contract for the rental of property, the party seeking to lease the property to another is known as the lessor, and the party seeking to lease the property from another is called the lessee.

What are the Contents of a Real Estate Contract?

A real estate contract names the parties, and describes the land or dwelling to be purchased or rented. The contract also includes the price the buyer or lessee pays for the sale or rental. The contract may contain other provisions, including how payment is to be made, and when payment is due.

Many real estate contracts include warranties. A warranty is a promise made by the seller or lessor that relates to the property.  For example, a lessor may insert, or the law may require, a warranty of habitability provision, promising to provide the leased premises in a habitable condition (fit for human life).

What Happens When a Party Breaches a Real Estate Contract?

In the event of one party’s breach, the other party may file a lawsuit in civil court to obtain money damages. Money damages are sums that compensate the non-breaching party for money it lost as a result of a breach. The value of the monetary damages is determined by the judge.

How Does a Court Determine the Value of Damages in a Contract of Sale?

The concept of “fair market value” is used to determine the amount of damages. “Fair market value” is defined as the price that a buyer would be willing to pay a seller willing to sell, if neither party is being pressured to go ahead with the deal. Factors such as how the property is currently being used, the appraisal value, and whether the property is damaged, determine the fair market value.

In a case where a buyer breaches the contract by failing to pay for the property, the seller’s money damages can be measured. The money damages equal the difference between the contract price for the house, and what the fair market value of the house is at the time of the breach.

In some instances, the seller may breach the contract. For example, the seller may promise to deliver the property in a habitable condition. The buyer, after paying for the house, may discover the house is not in a habitable condition. Under these circumstances, the buyer may be entitled to recover damages. These damages can be measured by the difference between the price the parties agreed on, and the actual value of the property at the time the seller committed the breach.

How are Damages Under a Lease Agreement Determined?

Under a lease or a rental agreement, a buyer may breach the agreement by failing to timely pay rent. The agreement may contain a provision requiring a tenant to pay a flat fee penalty, in addition to the owed rent. For example, a rental contract may require a tenant to pay the rent due, plus a penalty of $50, if the rent is not paid within two weeks of its due date. Courts may refuse to award these penalty damages if their amount is unreasonable or excessive. If the penalty amount is considered extremely disproportionate to the actual financial harm the landlord sustains, the amount will not be awarded by the court.

A lessor may commit a breach as well. A common lessor breach is the breach of the warranty of habitability. If the seller commits this breach, the buyer may be entitled to damages. Damages may consist of the amounts of rent already paid. Additional damages may include punitive damages. Damages may be awarded for physical harm, if the lack of habitability caused the tenant to sustain an injury or disability.

Am I Guaranteed to Recover Damages?

Neither party is guaranteed to be awarded the damages they claim. Damages must be measurable to be awarded. For instance, if a buyer claims damages because they are “really angry” the deal did not go through, the damages will not be awarded. The monetary value of being “really angry” cannot be measured.

Do I Need a Real Estate Lawyer to Protect My Rights?

If you believe the other party to a real estate contract has breached the contract, or if the other party claims you have breached the contract, you should contact a contract attorney. An experienced real estate attorney can explain your rights and options, assist you with preparing a complaint or defense, and can represent you in court.