What Happens if a Commercial Real Estate Contract is Breached?
Feb 06, 2024
It’s an everyday reality: The deal is sealed, the ink barely dry, and the contract set— but then, someone starts to second-guess. Perhaps a buyer pulls back, a seller gets cold feet, finances become a hurdle, or titles can’t be transferred.
Commercial real estate contracts are unique and fascinating because no two properties are identical. Each property is distinguished by its location, size, enhancements, buildings, access, resources, etc. But what happens if a seller backs out of the contract? What happens if any party backs out of the contract? The non-breaching party must understand the potential remedies available.
We will explain the most common solutions and discuss what provisions should be included in commercial real estate contracts to soften the blow of a breach.
Approaching litigation is effectively entering a formal legal process where disputes are settled in court. This method involves presenting the case before a judge or jury, with legal arguments and evidence as persuasion tools. Alternatives to this often costly and time-consuming process include arbitration or mediation, where a more conversational approach to dispute resolution is favored. Litigation should be considered after all other avenues—such as direct negotiation—have been exhausted, given its financial and emotionally draining potential.
When addressing damages for a breach of a real estate contract, it is about financial compensation, not physical repairs. These monetary damages serve as reparation for losses the non-breaching party incurs. Calculating the appropriate amount is case-specific and reflects the extent of the financial injury suffered due to the breach.
These ‘what could have been’ damages are predicated on the potential financial outcomes forgone due to the breach, aiming to fulfill what the non-breaching party would have likely achieved had the contract been honored. For example, if a buyer paid $1 million for a commercial property worth $1.2 million at the time of the breach, the buyer can claim the $200,000 difference in expectation damages from the seller who failed to transfer the title.
These ‘you owe me for that’ damages compensate for expenses a party incurred relying on the promise of the contract. They aim to cover the non-breaching party’s costs and losses incurred due to having trusted the contract’s validity. These damages can include amounts spent in preparation for a deal that ultimately fell through from another’s failure to uphold their contractual obligations. For example, if a tenant spent $50,000 on renovating a commercial space that the landlord breached by not providing the necessary utilities, the tenant can claim $50,000 in reliance damages from the landlord.
These ‘no surprises’ damages are pre-agreed upon terms outlined within the contract that stipulate a specific amount or a clear formula to calculate financial compensation in case of a breach. For example, a commercial lease contract may stipulate that the tenant must pay 10% of the annual rent as liquidated damages if they terminate the lease early without cause.
This court order requires the breaching party to perform their obligations as agreed in the contract. Specific performance is a rare and extraordinary remedy that is only granted when the subject matter of the contract is unique, and money damages are inadequate. For example, if a seller agreed to sell a historic landmark building to a buyer who intended to preserve it, and the seller breached by selling it to another buyer who planned to demolish it, the court may order the seller to cancel the second sale and complete the first one.
However, if the property has changed condition significantly, such as being altered or sold to another party, specific performance may not be enforceable. This remedy is commonly applied to benefit buyers, as sellers typically have financial damages as a recourse.
In your commercial real estate contract, include these critical clauses to protect your interests:
- Litigation Clause: Specifies the agreed-upon process to resolve disputes, potentially including preliminary negotiation efforts, and definitively identifies the jurisdiction for any necessary legal action.
- Damages Clause: Outlines the recoverable damages in case of a contractual breach of the real estate contract, setting strict limitations on the compensation scope.
- Specific Performance Clause: Enumerates the circumstances allowing the agreed performance to be legally enforced instead of seeking monetary compensation.
- Escrow Clause: Mandates using a neutral third party to hold financial assets or property until the transaction is fully executed. Learn more about real estate escrow services.
- Alternative Dispute Resolution Clause: Encourages the settlement of disputes away from court proceedings, highlighting mediation or arbitration as preferred methods.
Partner with Experts
To protect your interests and avoid disputes, consult a qualified commercial real estate attorney before entering any contract. A good contract should clearly define the rights and obligations of each party, the conditions and deadlines for performance, the remedies and penalties for breach, and the dispute resolution methods. A well-drafted contract can save you time, money, and headaches in the long run.
NexGen Title Agency is your single point of contact for all commercial real estate transactions. With expertise in dealing with all intricacies of corporate authority, conveyance, and zoning matters, we ensure your deal proceeds smoothly.
Beyond the settlement, our commercial Business escrow services manage all after-settlement disbursements with complete transparency. Contact us today at (757) 350-4580 to enter the world of easy commercial real estate transactions.