Can The Builder Sue Me To Close? California Law on Specific Performance in Residential New Contraction Contracts

If you have signed a contract to purchase new residential construction in California, such as a spec house or condo unit, but now do not want to actually close on the purchase, you might be wondering if there is a way the developer can force you to complete the purchase.

The answer, generally speaking, is no, the developer cannot force you to close. When a contract is breached (e.g., you don’t show up at closing), there are two types of remedies for the aggrieved party: damages (a court award of money) and specific performance (a court order compelling the breaching party to abide by the contract.)

Here is the rule, excerpted from a California State Court of Appeals case, on when specific performance is allowed:

Specific performance of a contract may be decreed whenever: (1) its terms are sufficiently definite; (2) consideration is adequate; (3) there is substantial similarity of the requested performance to the contractual terms; (4) there is mutuality of remedies; and (5) plaintiff’s legal remedy is inadequate.

Blackburn v. Charnley, 117 Cal. App. 4th 758, 766 (Cal. Ct. App. 2004).

In most cases requirements No. 4 and No. 5 cannot be met, making specific performance unavailable. Requirement No. 4 (“mutuality of remedies”) means the purchase agreement needs to give the buyer an equal remedy of specific performance against the seller in order for the seller to have such a right against the buyer. I have never seen a purchase contract that meets this requirement.

Requirement No. 5 (“plaintiff’s legal remedy is inadequate”) is more commonly phrased “no adequate remedy at law.” This means there has to be some reason why an award of money does not adequately compensate the seller for losses from the real estate buyer’s breach before the seller can compel you through specific performance to close.

The five requirements above are not either/or requirements. All five requirements must be met before a builder might be able to force someone who has contracted to purchase a property to close. While it is possible to think up a hypothetical where all five requirements will be met, in the real world such circumstances will rarely occur. And even if all the requirements are met, the buyer still has a number of other defenses. Remember, the rule is that if the five requirements are met, only then the judge may order specific performance. If the judge doesn’t feel doing so is fair, he or she may still decline decreeing specific performance.

Developers, whose lawyers have already explained the law to them, will often threaten a specific performance when a buyer refuses to close on a residential real estate purchase contract, hoping that buyers will be ignorant of this law.

Defaulting buyers should not be scared of this talk. California’s residential real estate law was specifically designed to shift a large part of the risk of a real estate downturn onto developers and off of home buyers and small scale real estate investors. If you have put down a deposit on a real estate deal, but now don’t want to close because of the drop in the real estate market or your own changed circumstances, it is a good idea to talk to a real estate lawyer to figure out what your options are. It is especially important that when you decide not to follow through on the purchase contract, you consult with a lawyer to take the proper steps to notify the developer and mitigate the developers damages.

Just don’t trust the self-serving statements made by your developer.

My fellow real estate law blogger Jared Beck has his own post on the law in Florida governing specific performance in real estate contracts.

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This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Greg Weston is an experienced business litigator licensed to practice law in California and Florida, and is a graduate of Harvard Law School. Mr. Weston’s frequently represents individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com.

Big trucks and SUVs sales fall

There have been a lot of articles lately about the shift in the US towards small, fuel efficient vehicles. For the first time ever, 4cyl vehicles are outselling 6cyl vehicles.

What these articles have missed is just how rapidly the sales of the largest SUVs and pickups are falling when you look at the data model by model.

GM April 08 v. April 07 shows that sales of Escalade EXT truck are down 45.7% and the regular Escalade SUV down 33.6%. The largest Chevrolet pick-ups and SUVs (Suburban, Tahoe, Silverado, Avalanche) are down 30.7%, 34.9%, 30.8%, and 34.9%.

The giant GMC Envoy, Yukon, and Yukon XL are down 68.6%, 38.4%, and 44.9%. Hummer sales are down 49.8%.

Ford’s largest SUVs models, the Explorer, Expedition, Moutaineer, and Navigator are down 38.5%, 35%, 55.7, and 7.1%. Ford’s all-SUV division Land Rover division sales are down 39.3%. Finally Ford’s full size F-Series pickup sales are down 21%.

Over at Chrysler, Dodge Durango is down 45%, Nitro is down 41%, Jeep Commander is down 49%, and Grand Cherokee is down 31%.

At Toyota, Lexus SUV sales are down 8.6% despite the introduction of the new LX 570, while Toyota’s light truck division saw sales fall 15.7%. Here are some individual vehicles:
FJ Cruiser SUV -46%
4Runner SUV -41.6%
Tundra pick-up -13.2%

Also, Toyota’s most expensive and gas-guzzling car, the Lexus LS, saw sales fall 42.2%. Meanwhile the company’s two most efficient cars, the Yaris and Prius, are up 45.9% and 53.8%. Prius is now Toyota’s 3rd best selling vehicle, and will soon outsell Toyota’s entire Lexus car and SUV lineup put together.

Those impressive Prius sales are even more remarkable when you consider that the current 2nd generation Prius model is now almost 5 years old. Usually sales fall substantially the last year before a model is refreshed. The 3rd generation 2009 Prius, due out in early 2009, will be bigger and faster than the current model, and is rumored to get as much as 94 MPG.