Rule No. 1 -- There Are No Rules

This is hardly so. But, as rules lead to order, that should be a good thing. Rules keep us from crashing into each other at intersections and help us determine when title is acceptable in a real estate sale.

Bright-line, clearly worded rules should be easy to follow. Life, however, rarely presents a simple set of facts like we might see in a hypothetical put to us in the classroom. Thus we try to bend the rules to make them apply to the facts at hand, or some try to bend facts to fit the rule.

As lawsuits get resolved, our courts, aided by the advocates' well-reasoned (or not) positions, fashion exceptions or even different rules to control unique situations. All of this means that the application of rules goes well beyond placing round pegs in round holes and square ones in square holes.

What I mean is best illustrated by several similar cases in which I am representing listing brokers. What the cases have in common is that buyers have not paid initial deposits on or before the due date. Upon advice of listing agents, this caused the sellers to terminate the agreements. In each of these cases, the listing agent was aware of a higher offer waiting in the wings.

Before diving into the remaining facts, let's explore a few rules. A basic rule is that a failure of timely performance of a "material" contractual obligation is a breach of an agreement. A breached obligation may be overlooked if it is minor in that it didn't cause the non-breaching party to suffer any loss and it is insignificant to the transaction. Does it matter if the buyer made a mortgage application two days late if the buyer is approved and the transaction goes to settlement without any extension? We would say that this breach is not "material". But when the agreement also provides that "time is of the essence", another rule holds that any failure to meet a deadline is a breach. And then there is the rule that entitles the non-breaching party to terminate when the other has breached.

The application of these general rules means that the sellers in my cases were seemingly justified in terminating agreements where the buyers were late in making their initial deposits. But facts are never so simple as I have stated them.

Let's add further to one of these late deposit situations. There the listing agent texted the buyer agent complaining that the original $1,000 was late. He went on to say that if it and a not-yet-due second deposit were paid by a certain date, the seller would be satisfied and would not terminate. The buyer agent, relying on this text, obtained a bank check from her buyer and was delivering it to the listing agent when she received the text "you're too late; the agreement is terminated". Do you still believe the late first payment of $1,000 justifies termination?

The added facts lead to the application of yet another rule! It is referred to as "promissory estoppel". It provides that an exchange of promises that causes one to rely cannot be pulled. Here the buyer relied on the seller's demand and thus should not have the promise (I won't terminate) pulled. That the buyer secured funds for the second payment earlier than required is significant and demonstrates that the buyer and seller were both benefitting from the exchange. Courts will also apply this doctrine when the promises leading to the changed conduct are oral.

And there are more rules to consider! A general rule holds that in some situations a party will have waived the other party's untimely performance. While the seller could have terminated, he did not. This is not an easy rule to apply and calls for very close scrutiny of the facts. It is usually applied when both parties ignore the dates for more substantial periods.

So what's my point? First, things aren't as simple as they seem. Second, one should never make clear pronouncements of law simply because a bright-line rule seems to have been crossed. The practice of law is much more than an application of facts to rules. It is nuanced and shaded and not as simple as the listing agents in our example assumed. I have located court opinions that hold that a late deposit is a basis for termination and other opinions that hold that a late deposit is not a basis for termination! It's not that one or several of these judges were wrong; the facts vary and therefore call for the application of different rules. Slight differences can lead to profound outcomes.

Consider further the practical outcome of termination. Assume the seller had the legal right to terminate and does so. The buyer then files a lis pendens and a lawsuit claiming that the missed payment was de minimis, justified based on some conduct by the seller or for any other rule or reason. Now the seller is unable to sell to the second buyer for that higher purchase price. Consider further that buyer two files a lis pendens to protect her from having the property go to buyer one! At this point does it really matter whether the seller had the right to terminate the agreement with buyer number one? Are we in the business of proving ourselves right regardless of the practical consequences?

I provided the example to a class of Realtors at a recent seminar. I was shocked to hear several days later that I had announced a new rule that a late deposit is not a breach of the agreement. For those of you who think I had said so, re-read this article! Rules are shaded by fact.

Copyright© James L. Goldsmith, Esquire, 2021

All Rights Reserved

Facts, opinions and information expressed in the Blog represent the work of the author and are believed to be accurate, but are not guaranteed. The Lancaster County Association of Realtors is not liable for any potential errors, omissions or outdated information. If errors are noted within a post, please notify the Association. Posts represent the author's opinion and are not necessarily the opinion of the Association.