What is specific performance?
Specific performance is an equitable remedy that forces the other party to perform under a contract, provided that party seeking performance (i.e., the plaintiff) is ready, willing and able to comply.
In most instances, the remedy of specific performance is brought by a buyer, who asks the court to order the seller to convey the property in exchange for the purchase price stated in a contract. The court’s judgment can serve as a valid transfer of the property, much like a deed.
Historically, and especially during the crazy real estate boom of the early 2000s, specific performance claims against buyers were rarely pursued. In fact, many sellers were happy to have a buyer back out, since it usually meant that the seller could sign a new contract with a new buyer at a higher price.
Impact of a declining real estate market on specific performance claims
What about specific performance claims against a buyer? While rare, they are certainly not unheard of. These claims typically come in a declining real estate market, or after disasters, when buyers have concerns about the disaster’s effect on real estate values (think Deepwater Horizon oil spill, red-tide or blue-green algae).
How can a court force a person to buy a piece of property?
Too often, lawyers and/or realtors operate under the mistaken assumption that the seller cannot obtain specific performance if the buyer cannot pay the purchase price. That’s wrong and where the surprise comes.
In granting specific performance to a seller, the court will order the buyer to pay the purchase price within a certain number of days. If the buyer fails to do so, the court will sell the property at a judicial sale, and apply the proceeds from that judicial sale to the seller.
If there is a shortfall between the amount obtained at a judicial sale and the price to be paid by the contract buyer, the court can order a money judgment against the buyer for the difference. Surprise! The equitable claim of specific performance by a seller has just resulted in a money judgment against the buyer!
Obviously, great care needs to be taken by a seller who pursues this option. Judicial sales result in notoriously undervalued prices, and even if a money judgment resulted, it would only be an unsecured obligation. However, with the right buyer, the risk of a substantial judgment may just be enough to convince the buyer to comply with the contract and close on the transaction. If you have any questions or concerns regarding specific performance clauses, please feel free to contact me at email@example.com or by phone at 239-344-1169.