Must expired contract be honored if escrow has not been released?

31 Replies

Hello, friends,

I'm going to describe a dispute without revealing my role in it. Truth is, the side I'm on is really not important, and I think I'll get the best and most unbiased advice if you consider it from both points of view. I'm truly stumped!  

This is taking place in Washington, DC which is a very powerful seller's market at present.

A buyer who holds a contract to purchase an off-market property has allowed the contract to expire while the property was undergoing a court procedure to clear title.

Informed early on that the contract had expired, the buyer declined to renew or extend the contract, but did direct the title company to retain the escrow payment ($5000). The escrow remained in the possession of the title company throughout the period of the court procedure, which has just ended, with the title now clear and ready to close.

The seller now claims there is no obligation to honor the expired contract despite the retention of escrow funds by the title company. The seller has received none of the escrow funds.

The seller at first asked the buyer to put in a new contract at a higher price.

The buyer insists that the original contract and contract price must be honored because the escrow payment has remained in place.

I’ll add something that may not be strictly relevant but it has poisoned the well from the perspective of the seller. Before the court case was completed the buyer or an associate went in and removed plywood from the entrance of the property and replaced it with a flimsy door, without the knowledge or permission of the seller. The seller took a picture of the door and called a locksmith to reinforce it, but locksmith didn’t get there before the door was broken and the property was entered illegally. A city official passing by the property determined it had become a public danger because of the break-in and ordered the city to replace the plywood within 24 hours, without notice to the owner. The city also slapped a fine on the seller.

The buyer denies knowledge or responsibility for the action on the property and the fine. 

The seller is furious and frustrated. The seller now asks if the seller may ignore the original contract from this buyer, and list the property.

Seller’s attorney cautions that if the seller tries to sell the property to another buyer, the seller runs the risk of a lawsuit, which, regardless of the merit, would be time consuming and costly to the seller. Attorney counsels against that risk and believes the seller should try to negotiate a higher price from the original buyer but settle at even if the buyer does not produce a new contract or a higher price.

The title company sides with the buyer and suggests that properties are bought and sold all the time with expired contracts, and the absence of an extension addendum does not matter because the escrow is still in pocket.

As a realtor I was trained to be hyperaware of the status of the contract and never to let it expire unless the buyer wants to walk. But we all know n real life people do all kinds of things, including close with an expired contract. I have also asked for my broker's guidance.

What's your best judgment? Consider answering the following questions:

a. Does the buyer retain the right to complete the purchase in spite of the expired contract because the escrow is in place? The buyer's counsel has advised that the the contract must be honored.

b. Can the seller list the property and disregard the expired contract? Or must the seller honor the expired contract?

Also, is there an alternative course of action to resolve this dispute? I'm missing it if there is.

Thanks for your time and thought, 

Nancy E. Roth

Seller is in default of the original contract for not delivering clear title when they said they would. Seller can not relist the property unless they have a contract release signed per mls rules.

Those of us outside of Your area don’t know what your contract says about a seller needing additional time to clear title.  Here,  as per our contract, when that occurs the seller is not in default but if it takes longer than 14days the buyer can choose to stay in the contract, or walk.....to stay in contract they have to sign an extension.

My gut reaction, since the buyer refused to sign an extension, would be the buyer is SOL.....but @Russell Brazil knows your contracts, I rarely disagree with him, so I’ll defer to him.

Hi, there, @Wayne Brooks , @Jim L. , and @Russell Brazil , thanks for your comments. I left out some of the gory details, which I'll supply here. I'm interested to see if they change your minds.

(1) This was an off-market contract for an unlisted property. The original contract signed by both parties is not a standard realtors' association contract for DC,  though I'm happy to shoot you a copy of one, Wayne, if you message me your email address. Obviously I can't show it to you but I'm sure you've all seen similar, shorter, private contracts.

(2) Property is a shell gained through a tax lien auction in Washington DC and had just come through foreclosure (took nearly 2 years in DC). Seller had just received the deed when buyer made offer. 

(3) Buyer's title company had a problem and was unable to close. Buyer requested and was granted an extension of the contract and switched title company.

(4) Second title company took a very long time--past closing date--to issue a decision to NOT insure title, due to outstanding lawsuits against the prior owning entity filed in a "foreign" court, (neighboring Maryland county). The liens on the entity had not shown up during DC foreclosure, which focused only on liens on record in DC, and only against the property, not owning entity.

(6) Seller was forced to go back to court to clear the remaining liens. Seller notified the buyer that the contract had again expired. Buyer did not respond. Seller incurred multiple additional costs during court process, including the mentioned fine due to buyer's unauthorized changes to property.

Does any of this information affect your thoughts about how this dispute should be resolved? Russell, this was not an MLS listed property--do the MLS rules still apply?

@Nancy Roth Just messaged you.  No, mls rules will have nothing to do with this.  It’s all dependent on the contract language, and state law if the situation is not properly addressed in the contract......one of the disadvantages of most of these “simple” contracts.

@Nancy Roth My position and belief has always been that a contract cannot expire because the other party has not or cannot honor their side. 

The seller is essentially saying "I will sell you this house for $100k if you settle by Aug 31. But since I didn't show up for settlement before then, I don't have to sell to you."  This is absurd thinking.

Unless the contract specifically states otherwise, I think the seller is wrong. What the buyer may have verbally said shouldn't matter due to the statute of frauds. If I was the buyer I would file a specific performance suit simply to get leverage against the seller.

Unless the the contract gave possession to the buyer, he is clearly liable for any damage re: the door.

The above is not to be considered legal advice just my layperson opinion of how I might handle a similar situation. 

PS the seller must be a scumbag if he got the property via a tax sale. :-)

Since its not the standard contract, it likely does not have the standard title paragraph, disposition of deposits, remediation of disputes etc. 

You still need the contract release form signed to list on MLS. You can list it with disclosure of pending release which Im sure you see often, but most people will want a copy of the contract release form. Many title attorneys in the area will not issue title insurance if they know there is an unreleased contract on the property. Some will however. On the buy side I use that as a threat that Ill notify every title company in 30 miles of the unreleased contract. That threat usually gets me what I want, which is usually a release of the deposit.

How much time are you talking about it taking to clear the title after the scheduled closing? 

The fact that there is still an EMD in escrow is irrelevant to the issue of who is right. No title company is going to release those funds until there is 1. a settlement or 2. joint instructions.

No skinny contract is going to have a 3. automatic release provision that could be followed with certainty under the circumstances... so that leaves 4. a court order.

Time for everybody to compromise a bit to resolve this and/or start paying more legal bills.

@Ray Slack Around 5-6 months for the court to get around to it. 

@Tom Gimer You are 100% right for sure. 

@Ned Carey Yes, those good-for-nothing tax lien investors!  So Ned, as usual I'm looking to you for some free education. You bring properties for foreclosure all the time. Has anything like this ever happened with one of yours? All this would have been avoided if the normative foreclosure process had turned up those foreign liens. If this happened to you would you think the foreclosure process had been incomplete? Should a foreclosure in one jurisdiction routinely look for liens in others? One thing I'm taking away from this case is, wow, this long, drawn-out foreclosure process is not even trustworthy. 

Also I'm not sure anyone caught something I mentioned about this, but the liens were against the prior owning *entity* not the *property*.  The *entity* had been defunct for years but the liens against it were still in force. The title attorney thought the holders of those liens could enforce them against the prior owner's foreclosed property (very unlikely), so declined to issue title insurance. 

@Nancy Roth Something isn't adding up, Nancy.

If the judgments were in Maryland against the prior owner entity, and this property is in DC, then the judgments would never become liens against the property unless recorded in DC. So to be clear, if the judgment(s) were not recorded in DC prior to or during the time the entity owned this property, then they would never affect the property.

Judgments aren't liens unless and until they properly attach to property.

Unless there is something missing from your fact pattern, those foreign judgments weren't and aren't the problem. Sounds to me like this is more likely a case of a title insurer refusing to issue title insurance following a tax sale... probably due to the $ amount of the taxes due when the tax sale took place.

@Tom Gimer You are very smart and I'm coming to you next time with a settlement. Well, I didn't mention that the tax lien auction was a "discount" tax lien sale--I didn't know it was relevant. Are you familiar with those discount sales? Those don't happen every year in DC and they are reserved for the worst of the worst properties that the City can't get off its books bc the liens are greater than the value and no one will buy them. So this occasional sale is like a safety valve for the City to clear out the problem properties.

Long story short: the seller paid no liens on the property after it came out of foreclosure. So the title insurer had no beef with the amount of tax due.

Wondering if you would have refused to insure had this come to you immediately after foreclosure, free of liens and ready to go. 

@Nancy Roth We do a lot of work in Baltimore so issues like this are neither new nor frightening. If all other liens were extinguished and/or abated, all necessary parties were properly noticed, we had a current and clear tax cert from DC, and everything else checked out, we would have closed this in a heartbeat.

I assumed you were the agent in a non listed deal. Are you saying you bought a tax lien in DC without telling me?

A. No, if the seller isnt willing to sign on the line that is dotted, right shmite. nobody can make an owner sell a property, but they could face litigation for not doing so should damages occur.  escrow still being with the title company is irrelevant. Did the buyer request it back and the seller refused? If they refused, maybe. 

B. Yes, no. Only thing to consider is giving back the deposit unless non occuring transaction was somehow buyers fault, and facing litigation from the former buyer....but its an expensive ordeal, they probably wouldnt win, and again the house would not be theirs unless the seller sells it.

Solution? Avoid court. Have a meeting. 

@Seth Parmelee @Wayne Brooks You are rrrrrright! My first tax lien investment. It has been really a long roller coaster ride. Not sure I'll do it again. I didn't even get into all the drama I went through with the predatory DC government with this property. 

@Ned Carey I thought I had told you! This has been brewing since March 2016, how could I not have mentioned it? 

@Jeffrey H. This thread got a little long, but somewhere up there I mentioned that the seller had not received any escrow funds. Your answer to question B is exactly what my lawyer told me, in essence, you may be right, but don't do it, it's not worth it. Avoid court. 

Having had this informative consultation (thank you all very much)  I've told the attorney I'm reluctantly going to close with this weasel. But he has to pay the fine for the door. And, this is trivial, but I want a remote closing because I'm afraid I'll lose it if I meet face-to-face with the incompetent title company, whose decision not to insure cost me thousands of dollars and added not one ounce of protection to the buyer. My colleagues will be warned, in person, one-on-one (NOT social media).

Next sale , if there is one, will be conditional on settlement with title company of my choosing.  (@Tom Gimer are you listening?)