Compelling specific performance of a real estate contract.

In a rising real estate market, deals are difficult to find and sometimes even more challenging to close. What happens when you finally enter into a contract to buy, but the seller refuses to proceed to closing?

Your remedy as a buyer is an action for specific performance. But as a would-be plaintiff, you must exercise your rights in a thoughtful and legally appropriate manner. An action for specific performance can fail if you delay or fail to take the proper immediate steps.

The first thing for a plaintiff to do may be to record a lis pendens (or notice of pendency of action) on the property. This places the public on notice of your claim, discouraging a third party from purchasing the property. Even if the contract at issue contains a clause requiring mediation or arbitration, the plaintiff can still attach a lis pendens to the property. Without a lis pendens, a bona fide third-party purchaser for value can steal the deal. The plaintiff may have no recourse except money damages against the seller, which in many instances is an indefinite and poor substitute for performance of the purchase agreement.

After recording the lis pendens, the next step is to prosecute the action diligently. Stubborn sellers may balk and delay mediation, or postpone and play games in arbitration. If there is a binding mediation and/or arbitration agreement (as is often found in home purchase contracts approved by the parties), and the seller refuses to participate in mediation or agree to arbitration before a qualified neutral, the best strategy is to move to compel arbitration. A petition to compel arbitration may force the seller not only to accede to an arbitration demand quickly, it may also enable the recovery of your attorneys' fees from the seller if the contract includes a provision for payment of attorneys' fees.

The next step is factual discovery. Even if the matter goes to arbitration, limited discovery with the permission of arbitrator will be allowed unless the arbitration agreement provides otherwise. Normally fertile areas exist to be explored. Inquire why the seller is seeking out of the deal. Has another offer been made on the property? Take the deposition of the real estate broker. Subpoena records from escrow. Serve subpoenas and employ written discovery to determine who has made offers for the property, and find out what has occurred, or who has intervened, to cause the seller to change his mind.

Arbitration will typically move much faster than an action in court. In arbitration, more formal rules of procedure and evidence may be relaxed. Regardless of whether the action is tried in court or arbitrated, however, the same legal principles will govern the case.

To prevail in a specific performance case, the plaintiff must prepare and present his or her case with care. Specific performance of a contract may be ordered whenever: (1) the contract terms are sufficiently definite; (2) consideration is adequate; (3) the contract is just and reasonable to the defendant; (4) there is substantial similarity of the requested performance to the contract terms; (5) there is mutuality of remedies; and (6) the plaintiff's legal remedy is inadequate. Specific performance cannot be obtained on oral contracts, not only because of the bar of the statute of frauds (the rule that requires real estate contracts to be memorialized in writing), but because the courts will not order specific performance if an agreement is uncertain or indefinite and does make clear and unambiguous the precise act to be done. Common defenses by a seller focus on construing express and implied conditions to the contract narrowly or broadly, interpreting and applying ambiguous or small print contract terms regarding timing or approvals, or relying on alleged representations or misstatements by the buyer or his agents, or on equitable principles.

There are traps in presenting a specific performance case. Often, a plaintiff will combine a claim for money for damages with a request for specific performance. Although it is permissible to plead alternative remedies, ultimately the plaintiff will have to decide what he or she wants. If the plaintiff urges too strongly that he has suffered tremendous financial harm by being denied the property, considering the market value of the property versus the contract price, this could boomerang to hurt his specific performance case.

Why? If the contract price of the property was for inadequate consideration (i.e., substantially below market), or for example, if equity would otherwise forbid the transaction (such as if the sale terms were somehow unfair to the seller under the circumstances, unjust, one-sided or fraudulent), specific performance may be denied.

In residential cases, such as for the purchase of single-family homes, there is a statutory presumption that specific performance is the correct course. Homes are deemed to be unique and are assumed to be harder to locate or replace. However, many of the most hard fought specific performance disputes concern investors seeking to develop land. There is a rebuttable presumption that specific performance is proper, but a seller may be able to undermine a buyer's case by taking discovery on the buyer's perhaps inconsistent damage claims and development plans.

The key to winning a specific performance case is evaluating the facts at an early stage and properly readying the case for settlement or litigation. Buyers must diagnose the strength of their claims at the outset and act quickly to prosecute their actions. Sellers need to consider their defenses and can achieve better results by exploiting the weaknesses of their adversaries. Like the land in controversy, each party and fact pattern will differ. Success depends on identifying the important legal and factual issues and meeting the specific challenges presented in an equitable action for specific performance.

An attorney with Rutter Hobbs & Davidoff, Geoff Gold's practice focuses on civil litigation, and he specializes in resolving complicated real estate and business disputes. For more information about entitlement to land, or any real property issue, please call Geoff at [phone], or e-mail him at [e-mail].