Failed Real Estate Deals: Key Lessons from a Recent Washington Case
Small oversights in contracts can lead to big problems. A new decision from the Washington Court of Appeals, Pacific Shoreline Properties, LLC v. First Liberty Bond, LLC, highlights some important risks for sellers. This case involved a failed sale of an apartment complex. The Court offers valuable insights for property owners who plan to sell. In this post, I will summarize the main holdings and explain what they mean for you as a property owner. My goal is to help you avoid similar pitfalls and protect your interests.
What Happened in the Case?
The seller, First Liberty Bond LLC, owned a low-income apartment complex near Spokane. The buyer, Pacific Shoreline Properties LLC, agreed to purchase it for $9.1 million under a Purchase and Sale Agreement (PSA). The deal included addendums with contingencies, such as approval from the Washington State Housing Finance Commission (WSHFC) and payoff of bonds. One addendum set a specific closing date of January 30, 2021, while an earlier one mentioned uncertain timing due to approvals and COVID-19 delays.
The parties worked together for months, even after the January closing date passed. The seller never said the deal was off, even helping the buyer with the WSHFC application. However, once approvals came through in May 2021, the seller stopped cooperating and refused to return the buyer’s $150,000 earnest money. The buyer sued for specific performance (i.e. forcing the sale), and for money damages. After a bench trial, the court ruled in favor of the buyer, awarding $1.3 million in damages plus the earnest money, based on the property’s increased value. The seller appealed, but the appellate court largely affirmed the trial court’s decision.
The Court’s Main Holdings
The appellate court agreed with the trial court on most points but clarified a few key issues:
1. Closing Dates in Contracts: The court held that the specific closing date in the later addendum (January 30, 2021) controlled over the earlier, more vague date. However, the seller waived that deadline through its actions, such as continuing to help with approvals after the date passed. The court also applied promissory estoppel, meaning the seller’s promises and conduct led the buyer to rely on the deal proceeding, so the seller could not back out without consequences.
2. Buyer’s Readiness to Close: The buyer proved it had secured financing and was ready to close once contingencies were met. The seller argued otherwise, but the court found substantial evidence, like loan approval letters, to support the buyer’s position.
3. Seller’s Breach of the PSA: The seller lacked full authority to sell because it needed written consent from a major investor (who owned 99.99% of the company). The PSA represented that the seller had authority, which was untrue. By stopping the closing without this consent and failing to communicate clearly, the seller breached the contract.
4. Damages Award: Instead of ordering the sale (specific performance), the court awarded damages equal to the difference between the agreed price ($9.1 million) and the property’s value at trial ($10.4 million), plus the earnest money. The appellate court upheld this, noting the valuation came from expert testimony.
The court also awarded attorney fees to the buyer under the PSA’s fee-shifting provision.
Lessons for Property Owners: How to Protect Yourself When Selling
This case serves as a reminder that selling property involves more than just signing a contract. Mistakes can cost sellers dearly. Here are the key takeaways:
– Ensure You Have Full Authority to Sell: If your property is owned through an LLC or involves investors, partners, or regulatory bodies (like the WSHFC here), obtain all necessary consents in writing before listing or signing a PSA. The seller in this case faced liability because it misrepresented its authority. As a seller, your realtor or lawyer should review your deed and any partnership agreement / LLC agreement early to avoid breaches that could lead to lawsuits.
– Be Clear and Consistent About Closing Dates: Contracts often include “time is of the essence” clauses, and specific dates usually win over vague ones. If you agree to a deadline but then act in ways that suggest flexibility—such as helping the buyer after the date passes—you may waive your right to enforce it. Communicate any concerns in writing right away to prevent claims of waiver or estoppel.
– Handle Communications Carefully: The seller’s ongoing help and lack of clear statements about killing the deal allowed the buyer to argue reliance. As a property owner, document all interactions and be direct if issues arise. Silence or mixed signals can work against you in court.
– Understand Financial Risks: If you breach a PSA, you might owe more than just the earnest money. Courts can award the buyer the “benefit of the bargain,” like the property’s appreciated value. In this case, that meant $1.3 million. Factor in potential market changes when deciding whether to proceed with a sale.
These lessons show how real estate deals can turn complex, especially with contingencies or regulated properties. By planning ahead, you can minimize risks and keep control.
If you are a property owner considering a sale or facing a contract dispute, please feel free to call our firm. Our lawyers draft and negotiate PSAs, resolve issues before they escalate, and represent buyers and sellers in court if needed. Please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.