As Americans who have an appetite for risk, we apply this with respect to the real estate market just like other markets. People purchase homes by selling their old homes and using the sale proceeds to fund the purchase of the new one. When this occurs, there are risks involved because the sale of the new home hinges on the sale price of the old home. Often, a homeowner will place his or her home on the market with the belief that the home will garner a certain price. Based on that, the homeowner will select a newer, bigger house and go “in contract” for the sale of the new home. If the sale of the old home proceeds according to expectations, purchasing the new home should go smoothly. However, if the sale price of the old home falls well below expectation, the buyer may have significant difficulty purchasing the new home.
For the seller of the new home, which is often a develop or investor, it is important to protect oneself from such a scenario. When signing a contract for the purchase of property, be it personal or real property, there are obligations on both the side of the buyer and seller. If the seller perceives that the buyer will be unable to perform on his or her side of the contract, the seller should apply the proper legal tools to reject the contract as soon as possible. In the case above, a seller can repudiate the contract through anticipatory breach, which is a recognized mechanism under Colorado law.
Anticipatory breach, also known as anticipatory repudiation, is a contract law term wherein one party to a contract, prior to the time of performance, “declares” that he or she will not perform his or her obligations under the contract. Note that this “declaration” need not be a definitive spoken statement; instead, any unequivocal indication that a party will not perform on his or her obligations under the contract can give rise for the other party to repudiate the contract.
The specific elements of anticipatory breach are:
- An unambiguous statement;
- Of nonperformance by the repudiating party;
- Prior to the time due for performance of the contract.
Note that Colorado law only recognizes anticipatory breach when the breach is in respect to a material aspect of a contract. While the facts and circumstances of each case determines materiality, the inability to pay the purchase price on a home per the terms of the contract are material. In the above example, the inability to pay the purchase price on the new home because of a less-than-expected sale price of an old home will constitute a material anticipatory breach.
If you are in the real estate business in Colorado, partner with an experienced Denver-area real estate attorney. Contact the Law Offices of Eric L. Nesbitt, P.C. for all of your Real Estate legal needs.