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Handling Deposit Disputes

by | Apr 12, 2022 | Arbitration, Mediation and Liquidated Damages

BROKER RISK MANAGEMENT

WEEKLY PRACTICE TIP

In today’s market, especially considering the number of non-contingent offers which are being made by buyers and accepted by sellers, the number of deposit disputes between buyers and sellers have dramatically increased.  The following addresses handling of deposit disputes to minimize agents’ risks.

BUYER’S AGENTS:  If you are representing a buyer and they intend to write a non-contingent offer, understand that this transaction is ripe for a potential deposit dispute.  Prior to writing the offer, send your client the CAR’s Market Conditions Advisory (Form MCA on zipForms) and request in writing that they read it, and most importantly, the provision regarding the meaning of non-contingent offers.

Buyers need to be advised that, if they write a non-contingent offer or have removed their Investigation Contingency, and then discovered a potential defect or have an objection to the property, they will not have a contractual basis for canceling the contract and obtaining the return of their deposit, and thus their deposit could be in jeopardy.  In this case, there are three approaches for the buyer to consider:

  1. Informational Access: When using the revised CAR RPA, considered utilizing Paragraph 3L(3) which allows “Informational Access to Property,” which includes inspections even with a non-contingent offer.  This will, at least, allow the buyer to do inspections even if the buyer has no contingency to cancel the contract based on what is discovered.
  1. Statutory Cancellation Right: If the statutory disclosures (i.e., TDS, NHSD, or FHDS) or an amendment thereto, have been provided to the buyer or their agent after the offer has been presented then the buyer has a statutory (NOT contractual) cancellation right for three days if delivered by hand delivery and five days by email or mail.
  1. Common Law Cancellation Right: If those avenues are not available, buyers may have a common-law right to cancel and obtain the return of their deposit, but they need to consult with qualified California real estate counsel for legal advice in making that decision.

PRACTICE TIPS

  1. Agents should refrain from providing clients with any legal advice, including, but not limited to the following:
  1. Do not render an opinion as to whether either party has breached the contract or acted in bad faith, or whether their client is entitled to cancel and to get their deposit back.  This is providing legal advice and must only be provided by the client’s attorney;
  1. Agents should never advise buyers at any time during the course of the transaction that they can cancel and recover their deposit; and
  1. Agents should not send demand communications of any type to the other agent demanding the return of the deposit as this is embroiling the agent in the deposit dispute.
  1. If your buyer wishes to cancel the contract:
  1. Refer your buyer to a qualified California real estate attorney for advice on the recoverability of a deposit and the potential cost of doing so.
  1. If the deposit is $10,000 or less, you can suggest to the buyer that they file an action in Small Claims Court as the limit involving individuals is $10,000.00.  The limit involving corporations is $5,000.00.
  1. You can refer your client to the CAR Mediation Center or refer your client to a qualified California real estate attorney to handle the recovery of the deposit.
  1. Do not become embroiled in the dispute by advising your client as to how to proceed.

            See Weekly Practice Tip “180914 Post Close of Escrow Buyer Claims”

  1. Once the parties have retained counsel, do not communicate with counsel regarding these issues.  Counsel the client may contact your broker and Broker Risk Management can be contacted by your broker/manager for advice.

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.  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 practices