BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
CAN A SELLER CANCEL A CONTRACT WHEN THE SELLER HAS NOT TIMELY PROVIDED ALL DISCLOSURES?
A situation which has recently developed involves a seller who failed to provide a buyer with a disclosure but then seeks to issue a Notice to Perform and/or Demand to Close Escrow followed by a cancellation of contract. The question that arises is whether the seller has the right to cancel the contract under these circumstances.
The answer is no. Consider the following scenarios.
SCENARIO NO. 1: Buyer writes a non-contingent offer. Escrow is scheduled to close on August 15. Seller discovers on August 12 that the seller has not provided Buyer with all the statutorily required documents. On August 12, the seller provides those documents to Buyer. Buyer fails to close the escrow on August 15, and the seller issues a Demand to Close Escrow. When the buyer does not close, can the seller cancel?
SCENARIO NO. 2: Seller provides buyer with a Transfer Disclosure Statement. All contingencies have been removed. Listing agent has not completed listing agent’s visual inspection. The close of escrow date passes. Seller seeks to cancel the contract. Can the seller cancel the contract?
DISCUSSION: In a recent Santa Clara Superior Court case, the Court held that if a seller has not fully performed all the seller’s obligations pursuant to the purchase agreement, the seller does not have a right to cancel the contract. In that case, the seller had provided an incomplete Transfer Disclosure Statement to the Buyer. After the Buyer undertook all inspections and removed all contingencies, the sellers changed their mind about selling the property as they thought the sales price was too low. They sought to cancel the contract. The Buyers filed a lawsuit seeking specific performance and recorded a lis pendens. The sellers sought to remove the lis pendens, arguing that the sellers had an absolute right to cancel the contract based on the Buyers’ failure to close the escrow within the time specified in the contract. The Court agreed with the Buyers holding that the sellers had an obligation to sell the property to the buyers and that the Buyers were not required to close the escrow given that the sellers had not provided a completed Transfer Disclosure Statement as required by statute. The Court specifically stated that unless the seller has fully performed under the contract, the seller does not have a right to unilaterally cancel the contract or demand the close of escrow.
Based on the foregoing, in the above-referenced situations, the seller had no right to unilaterally cancel the contract.
PRACTICE TIPS:
- If a seller seeks to cancel a contract, recommend that the seller consult with qualified California real estate counsel regarding whether they have a right to cancel the contract.
- It is important to manage the transaction file and ensure that all disclosures have been provided to a Buyer. If a new disclosure arises, agents should consult with their managers as to how to address the situation and what to disclose. However, if a disclosure arises after contingencies have been removed, sellers/listing agents must ensure the buyers receive those disclosures. Sellers need to be counseled that the Buyers may have a right to reopen contingencies as to that contingency.
- If a seller seeks to cancel a contract and the listing agent knows that all required disclosures pursuant to the law and the contract have not been provided to Buyer, the agent should notify the seller and advise the seller to consult with a qualified California real estate attorney before issuing that demand.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management LLP. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry but rather are intended to suggest good risk management practice.