The bait 'n' switch continued...
Part 2 of 2
Here we will look at how courts might view the matter and what remedies a seller faced with such a situation might have.
The key question is whether such a breach would be considered “material.” This is because if a purchaser’s breach is material, this will excuse further performance by the seller, which means that the seller can get out of the contract. 3511 13th St. Tenants’ Ass’n v. 3511 13th St., N.W. Residences, LLC, 922 A.2d 439, 435 (D.C. App. 2007) (citing cases).
The question of whether a particular breach is material has been called a “classic issue of fact” and involves an inquiry into issues such as whether the breach worked to defeat the bargained-for objective of the parties. Id. These issues are of the type that courts normally rely on juries to decide. Id.
There are no published cases in the District of Columbia (or Maryland) that deal with a switch from all cash to financing situation.
The case cited above, 3511 13th Street Tenants’ Association, involved the failure of the purchaser to tender an earnest money payment. In that case, the court refused to express an opinion on materiality of the breach, because that issue was one for the jury.
In our hypothetical, the fact that the offer was all cash was one of the key factors in causing the seller to accept the offer. While the purchaser might still be able to get to closing with lender financing, there is a good argument that the bargained-for objective of the parties has been defeated: namely, the seller’s objective of not having a transaction with the potential delay and uncertainty that comes with financing. In fact, the seller was willing to leave $5,000 on the table for that peace of mind. These factors weigh in favor of a finding that the breach was material.
This means that a seller who is on the receiving end of a bait and switch move by a purchaser should consider notifying the purchaser that such an act would be a material breach of the contract, and that if the purchaser proceeds with the financing, the seller will declare the contract to be rescinded. The seller could demand that the purchaser immediately provide a written assurance that the purchase would not be financed. If the purchaser did not comply with this demand, the seller could sell the property to someone else – possibly Offer A, if they are still around. A purchaser who wanted to stop such a sale would need to file an action in D.C. Superior Court for an injunction and specific performance. In the court case, the key issue would be the materiality of the breach.
Normally, in cases of rescission, the parties are returned to where they were before entering into the contract. See, e.g., Wright-Dean v. Garland, 779 A.2d 911, 915 (D.C. App. 2001) (case involving action for rescission). Accordingly, the purchaser may have a good argument that they should get their deposit back.
The seller’s alternative to rescission would be to go to closing and then sue the purchaser for breach of the contract. Id. Here, one could argue that the damages from the breach are $5,000, as that was the difference between Offer A and Offer B, and if it hadn’t been for the “all cash” term contained in Offer B, the seller would have accepted Offer A instead of Offer B. In the District of Columbia, claims for $5,000 or less may be brought in the Small Claims and Conciliation Branch of the Civil Division, where the process is more informal and, many times, the parties are not represented by counsel.
If you are a purchaser thinking about making an “all cash” offer and then trying to obtain financing after your offer is accepted, you should consider the possible risks before taking this course of action.