Execution of the Mutual Release in Real Estate Transactions
The issue presents itself with every failed transaction. Sign the Mutual Release, give the Buyer his deposit and move on.
But, is that really the best idea?
In a number of transactions, the Buyer will be in breach of contract. In those cases, why return the deposit when it is not required?
The Problem – Brokerage Policies
One of the issues that arises is the Brokerage standard form policy and procedure manual. It might say:
1) Don’t re-list the property,
2) Don’t sell to another Buyer,
without a Mutual Release.
This is an interesting policy. It’s often utilized, however it’s simply wrong!
Re-listing on MLS
In fact, a Mutual Release is not required. So, why have it as a policy?
Selling to a Subsequent Buyer
A release from the first Buyer is not a requirement, so, why have this as a policy?
Risks to Listing Agent and Listing Brokerage
Providing instant, unbending “legal advice” in such circumstances is foolhardy. It’s wrong and could lead to a lawsuit. The source of information in these cases seems to be nothing other than the policy itself. There are no reasons, rationale or cases referred to, just a simple policy.
Status of the Agreement of Purchase and Sale
Let’s assume that we have a simple transaction. Sam sells his property to Bob for $1 million with a $50,000 deposit. There is no bidding war and Bob is able to include conditions upon 1) financing and 2) home inspection.
Then, we have a problem!
Bob gets “buyer’s remorse”. He thinks he overpaid. He’s worried about carrying the payments and he’s worried about the commute to work and thinks he will have to buy a new car.
So, Bob wants out of the deal. It’s already a firm deal. This is what he does in order to get out of the deal:
1) He fails to deliver the deposit,
2) He doesn’t apply for financing, and
3) He doesn’t arrange for a home inspection.
Bob thinks that there is no contract. After all, he never paid the deposit.
Bob’s agent prepares a Mutual Release and forwards it to Sam’s agent. Bob and the Buyer’s Brokerage have already signed it.
Should Sam sign it?
Agreement in Breach
The answer to that question depends on an analysis of three matters:
Deposit – it was never delivered, that means Bob is in breach of contract.
Financing – Bob has not demonstrated “good faith” so he is likely in breach,
Inspection – It was never arranged, this is again a matter of “good faith”.
Remedies for Breach of Contract
Sam is entitled to sue for the deposit. It has been agreed to constitute liquidated damages. No proof of actual damages is required. This is the minimum Sam would get if he decides to sue.
In addition, if Sam has sustained further damages that he can measure, including, a lower sale price, increased carrying charges due to a later closing and other costs attributable to the failure of Bob to complete the transaction, he can sue for that as well. Assuming that he sustained $75,000 in damages, he would secure a Judgment in the amount of $75,000. If the deposit had actually been paid, then he would keep the deposit and secure a Judgment for the balance in the amount of $25,000.
Role of Listing Agent
What should the Listing agent do in these circumstances? Given that there are three matters which may constitute a breach of contract entitling Sam to certain legal remedies, then rushing to the Mutual Release would seem foolhardy.
Wait! Seek Sam’s instructions! Advise Sam that he should obtain “legal advice”. Then, document Sam’s answer. If he declines legal advice and simply wishes to “move on”, then it may be appropriate to proceed with the release.
If Sam is very hesitant and wants to sue, then turn the entire matter over to Sam’s lawyer, The resolution is outside of the usual and ordinary scope of business of a real estate agent. Continuing further to arrange for the release at this point would be risky.
It is necessary to document Sam’s “INFORMED CONSENT”.
Brian Madigan LL.B., Broker