Legal Question in Real Estate Law in California

Re: new property (new home)

I'd say the starting point is to read your contract and see what it says about breach and remedies for breach. Is there a mediation or arbitration clause? Is there a liquidated damages provision? How about an attorney fee provision? Then, ask the builder/seller about its policy.

Generally, California limits liquidated damages clauses to 3% of the contract price, and I'd say this is the most you'd stand to lose in a suit. They may be content just to take the $5,000 as a forfeiture. Unless there is an express provision in the contract, or they have a nasty policy about sueing breaching buyers, this is probably the worst that can happen.

On the upside, if they can still make a profitable sale at the new price, the builder may let you off the hook if you do a prompt closing at the new price - they might be better off than pocketing the $5K and losing the sale.

Theoretically, they could sue for the entire lost profit on the higher price, and win, and might do so if there is an attorney fee clause, but most builders would go with forfeited $5K, or ask for 3%, or settle for some lesser amount in that range, partly because lost profit is hard to prove and they may not want to reveal their costs.

Specific performance is available as a remedy for buyers when the seller defaults, but I do not think any California judge would or could order a defaulting buyer to go through with the transaction.

Since you have already signed a contract to pay the higher price, the builder is not obligated to give you the benefit of a subsequent price reduction. That's the flip-side of the obvious proposition that it could not increase the price on you after you signed a contract if the market were rising instead of falling.

So, I don't know how this will come out, but there is a brief discussion of the range of possibilities.

Re: new property (new home)

You are obviously dancing around the fact that you have a contract. Your question is whether you should breach your contract.

The late Justice Holmes calls a breach in this situation an "efficient breach of contract." If a party can breach a contract, and get a better deal, and afford to pay the damages for breaching the first contract, then the party should breach the contract. In other words, if after paying damages for breaching the contract (what are known as expectation damages) the new contract is still a better deal, then you should breach.

As my law professor once said, "There are no bad guys in contract law."

That is the philosophy behind Mr. Whipple's analysis.

Very truly yours,