The Land Sale Contract and the Risk of Loss
On March 1, Sellers and Buyer signed a written contract for a house: price $500,000, closing June 1, with the buyer's obligation to close conditioned on obtaining a mortgage commitment by May 15. The contract is silent on risk of loss and does not include a liquidated damages clause. On April 10, a fire caused $120,000 in damage; the house is still standing and repairable. Buyer had not yet applied for financing. On April 20, Buyer sent a letter purporting to cancel, citing the fire. Sellers tendered the deed on June 1 with the insurance proceeds assigned to Buyer. Buyer refused to close. The jurisdiction has adopted the doctrine of equitable conversion and enforces the common-law rule that risk of loss passes to the buyer at contract formation unless the contract says otherwise.
1. Who bears the risk of the fire loss, and can Buyer cancel because of it?
Read the worked answer
Equitable conversion. Once a valid contract for sale is signed, equity treats the buyer as the owner of the realty and the seller as holding legal title in trust for the buyer, with the buyer holding the purchase price in trust for the seller. Under the common-law rule adopted here, risk of loss passes to the buyer at formation. The fire is therefore Buyer's loss, subject to the seller's duty to credit insurance proceeds.
Insurance proceeds. Sellers must assign the fire insurance proceeds ($120,000, or the policy limit) to Buyer at closing. If Sellers are underinsured, Buyer bears the shortfall. Sellers tendered the deed with the assignment, which is the required performance.
Cancellation. The fire does not excuse Buyer's performance. The house remains repairable and the contract's subject matter is not destroyed. Buyer's April 20 letter is an anticipatory breach. Buyer's remedy, if any, is a price adjustment only if the contract or a statute provides one - not unilateral cancellation.
Exam point. Distinguish the common-law rule (buyer bears risk) from the Uniform Vendor and Purchaser Risk Act (seller bears risk until possession or title passes), and check which the jurisdiction follows. Here the common-law rule controls.
2. Buyer never applied for financing. What are Sellers' remedies, and can they keep any deposit?
Read the worked answer
Financing condition. The mortgage contingency is a condition precedent to Buyer's duty to close. A party cannot rely on a condition it prevented from occurring. Because Buyer never applied, Buyer cannot invoke the financing condition to excuse performance; the condition is deemed satisfied or excused. Buyer's refusal to close is therefore a breach.
Sellers' remedies. (1) Specific performance: land is unique, so Sellers may compel Buyer to pay the price and take the deed, with the insurance proceeds credited. (2) Damages: the difference between contract price and market value at the time of breach, plus incidental costs. (3) Rescission and retention of the deposit: only if the contract makes the deposit liquidated damages. Here there is no liquidated damages clause, so Sellers cannot simply keep a deposit as a penalty; they must account for it against actual damages. If the deposit is nominal and actual damages are greater, Sellers may recover the difference; if damages are less, the excess deposit must be returned.
Mitigation. Sellers must mitigate by relisting and selling to another buyer, and must credit the resale price against the claim. The assigned insurance proceeds reduce Sellers' loss, because Sellers cannot recover twice for the same injury.
Exam takeaway. The financing condition is not a free exit when the buyer sabotages it, and the absence of a liquidated damages clause limits the seller to actual damages or specific performance.