The Inspection Email, the Cancellation, and the Fire Before Closing
On March 1, seller Dana signed a counteroffer to buyer Evan’s offer to purchase Dana’s duplex for $390,000. The contract provided: $20,000 earnest money held by the listing broker; an inspection contingency allowing Evan to give written notice of unacceptable conditions within seven business days; a 21-day financing contingency; closing on April 10; “time is of the essence”; and a clause stating that if buyer defaults, seller may keep the earnest money as liquidated damages and sole remedy. On March 6, after the inspection, Evan emailed Dana a contractor’s estimate for $12,500 to replace polybutylene plumbing and asked that the price be reduced by that amount. He did not use the contract’s notice form and did not say he was terminating. Dana refused the credit and on March 12 sent a notice cancelling the contract and keeping the deposit. On March 20, before any closing, a kitchen fire caused $45,000 in damage. Dana’s policy names Dana and “contract purchaser” as insureds. Evan now demands his deposit back and claims he was ready to close.
1. Was Evan’s March 6 email an effective termination or a default, and was Dana’s March 12 cancellation justified?
Read the worked answer
The email was a request to modify, not a termination. The inspection contingency gave Evan a choice: accept the property or give written notice of unacceptable conditions and terminate. Evan did neither precisely. He sent an estimate and asked for a $12,500 price reduction. A request for a concession during an existing contract is ordinarily an offer to modify, not a repudiation and not a rejection of the contract. It does not, by itself, excuse Dana from performing.
Dana’s refusal did not create a default. Once Dana refused the credit, the original contract remained in force unless Evan’s communication was an unequivocal refusal to close. Nothing in the facts shows that. Evan’s email did not state that he would not perform, and he later claimed he was ready to close.
Dana’s cancellation was therefore premature and likely an anticipatory breach. “Time is of the essence” applies to deadlines the contract creates; it does not let Dana declare a default where Evan merely negotiated. Unless the contract made a request for repairs an automatic breach or required all communications on a specific form, Dana had no basis to cancel and keep the deposit on March 12.
2. Is the $20,000 liquidated damages clause enforceable, and who is entitled to the deposit?
Read the worked answer
Liquidated damages clauses are enforceable only if they are a reasonable forecast of damages and actual damages would be difficult to estimate. A deposit of $20,000 is about 5.1% of the $390,000 price. Courts commonly uphold deposits in that range, especially where the seller’s sole remedy is the deposit and the buyer is not exposed to specific performance. The clause is probably enforceable as written.
Enforceability does not answer who keeps the money. Liquidated damages are triggered by the buyer’s default. Evan’s email was at most a negotiation; it was not a refusal to close. Dana cancelled first. A seller who wrongfully cancels cannot use the buyer’s default clause to keep the deposit. The deposit should be returned to Evan, or held in escrow pending resolution, and Dana may be liable for breach.
The “sole remedy” language cuts both ways. It limits Dana to the deposit if Evan defaults, but it does not give Dana a deposit when Dana is the breaching party. If Dana proves Evan repudiated, Dana may keep the $20,000; on these facts, Dana has the weaker position.
3. If the contract had still been in force on March 20, who would bear the $45,000 fire loss, and how would the insurance proceeds be allocated?
Read the worked answer
Under the traditional equitable conversion doctrine, the buyer bears the risk of loss once the contract is enforceable. Equity treats Evan as the owner and Dana as holding legal title as security for the price. If the contract were still in force, Evan would be obligated to close and would bear the $45,000 loss, subject to the contract’s terms and any controlling statute. Many states have changed this result by statute or by a uniform risk-of-loss rule placing the risk on the seller until closing or possession; the contract and local statute control.
The insurance clause points to Evan. Dana’s policy names the “contract purchaser” as an insured. That is consistent with the parties intending Evan to receive the proceeds if a loss occurs before closing. Evan would close and receive the $45,000 proceeds, or the price would be adjusted by that amount.
But Dana cannot rely on a contract Dana repudiated. If Dana’s March 12 cancellation was wrongful, Dana remained the owner for risk purposes and cannot force Evan to close. Evan may rescind, recover the deposit, and leave Dana to pursue insurance. A party in breach cannot use equitable conversion as a sword.