June 27, 2014

Specific Performance

Many past clients have inherited real estate, e.g. a home, from their parents whether through probate or a trust. Frankly, it is almost logical that a child would inherit real property from a trust given that real property ownership is almost always a condition precedent for writing a trust. The reason being is that assets held in trust, such as real property, avoid probate. A California probate is notoriously known for being long and expensive. Furthermore, there is generally no better transfer method of  real property than through a trust.

These clients have often insisted that the property be sold promptly given that they do not have the same emotional attachment to the property as did their parents and the favorable tax treatment afforded inherited real property (see step-up in basis). This inclination to sell is understandable but there is an important variable to ponder when making a decision to sell real property, the remedy known as specific performance.

Real property, in the eyes of the law, is considered a unique item. No two parcels of real property are alike. Each house on any street has its own unique blend of characteristics. When a seller and buyer have entered into a contract to convey real estate, the consideration at issue is unique. The law presumes that no amount of money damages can compensate the buyer when the seller has breached a contract to sell a unique asset such as real property. Thus the law affords in such cases the buyer an equitable remedy known as "specific performance." This remedy requires that the seller transfer the property to the buyer provided certain certain conditions are met. For reference, the remedy usually awarded in a breach of contract case is money damages, i.e. the amount necessary for the non-breaching party to reap the benefit of the bargain (yes classic legalese.     

The relevance of specific performance is that once a seller decides to sell the property, the seller may be forced to transfer the property even if they change their mind during the course of the transaction. In practice this means that if a seller and buyer have entered into escrow, the ball is in the buyer's court. The seller can generally only opt of the contract for a breach by the buyer, e.g. failure to waive the physical inspection contingency within the agreed upon time. Conversely, the buyer can opt of the contract without liability during the contingency period. For instance, the physical inspection report might reflect significant termite damage or a rotting roof.   

While most clients do not change their minds about selling mom's home mid-stream, i.e. in escrow, it is prudent to be aware of the consequences for doing so.