4.2 Contract Performance, Breach, and Enforceability

How contracts end

A contract is most often discharged by performance — each party fully does what was promised. But contracts can also end by agreement (mutual rescission), by operation of law (bankruptcy, expiration of the Statute of Limitations), or by breach.

Substantial performance matters in real estate. If a party performs the essential terms but leaves minor items incomplete, courts may treat the contract as performed while awarding the other party damages equal to the cost of finishing. A builder who completes a house but installs the wrong faucet has substantially performed.

Time is of the essence

When a contract states that "time is of the essence," every deadline becomes a material term. Closing one day late is then a breach, even if no one is harmed. Without that clause, courts allow a reasonable time for performance. Exam questions hinge on whether the clause is present.

Breach and remedies

A breach is a failure to perform a contractual duty without legal excuse. The non-breaching party chooses among several remedies.

Worked example — liquidated damages. A buyer deposits $9,000 earnest money on a $300,000 home (3%). The contract names the earnest money as liquidated damages. The buyer defaults with no contingency protection. The seller may retain the $9,000 as the agreed remedy and generally cannot also sue for additional damages — choosing liquidated damages waives the right to pursue actual losses.

Because real estate is considered unique, courts readily grant specific performance to a wronged buyer — money cannot substitute for a one-of-a-kind parcel. This is why specific performance is associated with real property more than with consumer goods.

Transferring and substituting parties

Two concepts are routinely confused on the exam.

• Assignment transfers a party's rights and obligations under the existing contract to a third party (the assignee). The original party (assignor) usually remains secondarily liable unless released. Most real estate contracts are assignable unless they say otherwise.
• Novation substitutes a new party or a new contract for the old one, and the original party is released from liability. A novation requires the consent of all parties.

Quick test: if you ask "Is the original party still on the hook?" — assignment often leaves them liable; novation releases them entirely. A buyer who assigns a purchase contract may still owe if the assignee defaults; a buyer released by novation owes nothing.

Statute of Limitations

Each state sets a time limit to sue on a contract (commonly several years for written contracts). After it expires, the claim becomes unenforceable, even though the contract was valid.

Liquidated Damages, Mitigation, and Earnest-Money Disputes

When a buyer defaults, the contract usually directs how the earnest money is handled, but the exam tests the underlying rules.

Liquidated damages must be a reasonable pre-estimate of harm, not a penalty. If the named sum is wildly disproportionate to likely loss, a court may refuse to enforce it as an unlawful penalty and require proof of actual damages instead.

Election of remedies: a seller generally must choose one path. Keeping the earnest money as liquidated damages typically waives the right to also sue for actual losses or specific performance for the same breach.

Duty to mitigate: the non-breaching party must take reasonable steps to limit damages. A landlord whose tenant breaks a lease usually must try to re-rent rather than let the unit sit and sue for the full term.

Worked example: A buyer defaults on a $400,000 contract with $12,000 earnest money named as liquidated damages. The seller relists and sells three weeks later for $398,000, incurring $1,500 in extra carrying costs. If the seller elects the liquidated damages, the seller keeps the $12,000 and cannot also recover the $1,500 plus the $2,000 price gap. If actual damages ($3,500) are far below the deposit, a court may still enforce the agreed $12,000 if it was reasonable when the contract was signed — courts judge reasonableness at formation, not in hindsight.

Assignment vs. Novation Applied, and Accord and Satisfaction

The transfer-of-parties rules generate a reliable question type.

Assignment moves a party's rights (and usually duties) to an assignee, but the original party typically remains secondarily liable unless expressly released. Novation substitutes a new party or new contract and releases the original party entirely, and it requires all parties' consent. The diagnostic question is always: is the original party still on the hook? Assignment = usually yes; novation = no.

Worked example: A buyer under a $350,000 purchase contract assigns it to an investor. The investor defaults. Because this was an assignment, the original buyer can still be pursued unless the seller had agreed to release them. Had the parties signed a novation substituting the investor, the original buyer would owe nothing.

Accord and satisfaction is a related discharge method: the parties agree to accept a different performance (the accord) than originally promised, and completing it (the satisfaction) discharges the original obligation. A seller who accepts $5,000 and a promissory note instead of a disputed $7,000 repair credit has discharged the claim by accord and satisfaction. Distinguish it from a simple breach: here both sides agree to the substitute, so no breach occurs.

Liquidated Damages, Mitigation, and Earnest-Money Disputes

When a buyer defaults, the contract usually directs how the earnest money is handled, but the exam tests the underlying rules.

Liquidated damages must be a reasonable pre-estimate of harm, not a penalty. If the named sum is wildly disproportionate to likely loss, a court may refuse to enforce it as an unlawful penalty and require proof of actual damages instead.

Election of remedies: a seller generally must choose one path. Keeping the earnest money as liquidated damages typically waives the right to also sue for actual losses or specific performance for the same breach.

Duty to mitigate: the non-breaching party must take reasonable steps to limit damages. A landlord whose tenant breaks a lease usually must try to re-rent rather than let the unit sit and sue for the full term.

Worked example: A buyer defaults on a $400,000 contract with $12,000 earnest money named as liquidated damages. The seller relists and sells three weeks later for $398,000, incurring $1,500 in extra carrying costs. If the seller elects the liquidated damages, the seller keeps the $12,000 and cannot also recover the $1,500 plus the $2,000 price gap. If actual damages ($3,500) are far below the deposit, a court may still enforce the agreed $12,000 if it was reasonable when the contract was signed — courts judge reasonableness at formation, not in hindsight.