4.2 Contract Performance, Breach, and Enforceability

Performance, Breach, and Enforceability

Once a valid contract exists, the exam asks how it ends and what happens when someone fails to perform.

Executed vs. Executory

These near-identical terms trip up candidates:

• Executory - one or more terms remain to be performed. A signed purchase agreement awaiting closing is executory.
• Executed - all terms have been fully performed; the deal has closed and the deed delivered.

Do not confuse "executed" (fully performed) with "a signed/executed document." On the exam, executed means completed performance.

How Contracts Terminate

Contracts end by performance (both sides perform), mutual rescission (both agree to cancel), or operation of law (death of a party in a personal-service contract, bankruptcy, expiration, or impossibility). Breach by one party also gives the other the right to terminate and seek a remedy.

Remedies for Breach

When a party defaults, the non-breaching party chooses among remedies:

Because each parcel of land is legally unique, courts readily grant specific performance against a defaulting seller—money is presumed inadequate. That uniqueness principle is a favorite exam point.

Liquidated Damages: A Worked Numeric

A buyer deposits $8,000 earnest money on a $400,000 home (2%). The contract states the deposit is liquidated damages if the buyer defaults. The buyer walks away. The seller keeps the $8,000 and need not prove actual loss—provided the amount was a reasonable estimate of damages when signed. If the deposit had been an inflated $120,000 (30%), a court would likely strike it as an unenforceable penalty, and the seller would recover only provable actual damages.

Assignment vs. Novation

These transfer concepts are commonly paired as distractors:

• Assignment - one party transfers its rights under the contract to a third party (the assignee). Unless the contract prohibits it, most real estate contracts are assignable, but the original party remains secondarily liable if the assignee fails to perform.
• Novation - the parties substitute a new contract or new party for the old one, and the original obligor is fully released from liability. A lender approving a buyer's assumption with a release of the seller is a novation.

The key distinction: assignment does not release the original party; novation does.

Time Is of the Essence

A "time is of the essence" clause makes every stated deadline a material term. Missing a closing date by even one day can constitute a breach, allowing the other party to terminate and pursue remedies. Without such a clause, courts typically allow a reasonable time to perform. Expect a question where a one-day delay matters precisely because the clause is present.

Termination by Operation of Law

Some events end a contract automatically, without any party's choice. Impossibility of performance—for example, the destruction of the subject building before closing—can discharge the parties. Bankruptcy of a party, expiration of an option period, and the death of a party in a personal-service contract (such as an agency listing) also terminate obligations by operation of law.

Contrast that with a purchase agreement, which generally survives the death of the buyer or seller: the contract binds the estate, and the executor must close. Examiners use this distinction to test whether you can separate a personal agency relationship (ended by death) from a property sale contract (binding on heirs). Read carefully for whether the question describes a listing or a signed sale.

Contingencies as conditions, and the buyer's and seller's default remedies side by side

A breach analysis often turns on whether a condition was satisfied. A contingency (financing, inspection, appraisal, sale-of-home) is a condition precedent: if it fails within its deadline, the buyer may cancel without breaching and usually recovers the earnest money. Letting a contingency deadline pass without acting generally waives it, after which failure to close is a breach. Distinguish a true breach (no excuse) from a permitted cancellation (a condition failed).

Remedies, by who defaults: If the buyer defaults, the seller may (1) keep the earnest money as liquidated damages if the contract so provides and the amount is reasonable, (2) sue for compensatory damages, or (3) sue for specific performance to force the purchase (rare against a buyer). If the seller defaults, the buyer may (1) sue for specific performance — readily granted because land is unique — (2) sue for damages, or (3) rescind and recover the deposit.

Worked numeric — seller's resale loss: A buyer breaches a $420,000 contract; the seller relists and sells for $405,000 two months later, incurring $3,000 in extra carrying costs. The seller's provable compensatory damages are $15,000 (price gap) + $3,000 = $18,000. If the earnest money was $8,400 (2%) and named as liquidated damages, the seller chooses between keeping the $8,400 or suing for the $18,000 actual loss — generally not both. The exam tests that liquidated damages and actual damages are alternative, not cumulative, remedies.