Understanding Specific Performance

In a hot real estate market and equally in an uncertain one, a Seller may try to get out of an agreed-upon purchase contract, perhaps to take a better offer. What does a frustrated Buyer or real estate agent do? The answer may be found in the law of Specific Performance, and that is the subject of today’s Article.

Here’s the scenario: The Buyer has finally found the home of their dreams and they and their real estate agent are excited that the Seller has accepted their offer. Suddenly, the agent gets an e-mail from the Seller’s agent: the Seller has found a buyer willing to pay more and is refusing to go forward unless the first Buyer meets or beats the new offer. Sound far-fetched? Not at all. This scenario is played out with great regularity both in residential property sales (including rental properties) as well as commercial and industrial transactions. So what do you do if you are the Buyer or agent facing this situation? The key is to understand the law of Specific Performance.

Specific performance is an Order of a court which requires a party to perform a specific act, usually what is stated in a contract… such as completing the sale agreed to in a real estate purchase and sale agreement. Unlike a lawsuit for money damages for breach of contract (which is what is actually occurring), a lawsuit for Specific Performance is seeking for the Court to force the Seller to perform their obligations under the Contract. As such, this is considered an “equitable remedy” forcing the seller to act fairly towards the Buyer and giving the Buyer the benefit of what they contracted to receive. In fact, if the Seller still refuses to cooperate, the Court can actually complete the sale on the Seller’s behalf. Of course, since this claim arises because the Seller has violated the Contract, the Buyer can generally also recover their attorney fees and costs incurred in bringing this lawsuit.

While specific performance can be in the form of any type of forced action, it is usually used to complete a previously agreed upon real estate transaction where all of the essential terms are contained in a written agreement and signed by both Buyer and Seller. In California, this law is located in CA Civil Code Sections 3384 et seq. which includes certain conditions on when this remedy can be used. For example:

(1) Specific Performance will not be granted if money alone will make the inured party whole. However, real estate is generally considered sufficiently unique to warrant the remedy. Section 3387 states that it is to be presumed that the breach of an agreement to transfer real property cannot be adequately relieved by monetary compensation. In the case of a single-family home which the party seeking performance intends to occupy, this presumption is conclusive. In all other cases, this presumption is a presumption affecting the burden of proof.

(2) The person seeking to enforce the Contract have either signed the Contract themselves or provided some other such as performance – such as under a lease option, or a contract for deed, or making repairs – things which a person would not do unless there was some contract benefit for them to do so. Section 3388 states that a party who has signed a written contract may be compelled specifically to perform it, though the other party has not signed it, if the latter has performed, or offers to perform it on his part, and the case is otherwise proper for enforcing specific performance.

(3) The person seeking to enforce the Contract must have performed all obligations required of them up until the time of the Seller’s breach… they cannot be in default on the Contract and expect the Court to enforce it for their benefit.

There are numerous other conditions and restrictions set forth in the Civil Code which can influence the availability of this remedy but, when the facts are there, this is a very effective tool in the arsenal of real estate buyers and agents. Does it really work? Here’s a real life example, a few years ago my wife and I were buying an REO through an online listing service. We’d filled in and submitted all purchase forms, conducted our inspections, waived contingencies, and had received an e-mail from the Agent that the Seller/Bank had accepted our Offer. Then, 2 days later he e-mailed us that the Bank refused to sign and was going with a higher offer. I said, No Way. Within 3 hours, I had filed a lawsuit for Specific Performance against the Bank and recorded a Notice of Pending Action clouding the property’s title. In this case, the Bank had not signed the Contract but, I alleged that the agent’s e-mail was an effective acceptance that had induced our performance. Faced with this, within hours after we e-mailed them the Complaint, the Bank signed our Contract and we promptly closed escrow on a great investment.

BPE Law has been assisting our clients with their real estate, business, estate planning, and other legal needs ever since we started doing business nearly 20 years ago. We’re active in the communities in which we live and in protecting and expanding our clients’ opportunities for business and real estate ownership … and providing assistance when they’re challenged. If you have questions concerning your estate plans, real estate, business, or any other legal matter, give us a call at (916) 966-2260 or e-mail me at sjbeede@bpelaw.com. Our flat fee consult for new clients may get you the answers you need for the questions you have.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.