QUESTIONS: I represent the Sellers who have been in contract to sell their home since February. The Close of Escrow date has always been set for April 7, 2020. The Buyers only had financing and appraisal contingencies, both of which were removed. The Sellers have fully performed and signed escrow instructions on April 3rd; on April 4th the Buyers’ Agent called and said, “Buyers are afraid to Close.” The Parties never signed anything about COVID-19, the lender will fund, but the Buyers’ Agent said the Buyers have an absolute right to cancel because of the pandemic.
The Buyers’ cancellation form specifies that the Contract is cancelled “by mutual agreement” and the Buyers are to get the full deposit. The Sellers are furious; they want the deposit per the liquidated damages clause. I think the Sellers are right because the Buyers are in breach. What should I do? Should I ask the Buyers’ Agent to prepare a new cancellation form that specifies the Sellers get the deposit or should I prepare that paperwork?
ANSWER: When there is an attempt by one of the Parties to cancel (for any reason) and the other Party does not agree to that cancellation, Agents should recognize that there is now a LEGAL DISPUTE regarding the viability of the cancellation and a LEGAL DISPUTE regarding who is entitled to the deposit. You should not advise your Clients that they are right or wrong. When there is a legal dispute, the ONLY thing that you should do is to advise your Clients to consult with a qualified California real estate attorney to determine their rights, duties and obligations. NO further paperwork should be requested or prepared.
In the absence of any contractual provisions which dictate what is to happen as a result of COVID-19, no one should assume that either of the Parties does or does not have a valid basis to cancel the Purchase Agreement. The Buyers’ Agent should not have prepared the cancellation paperwork to indicate that there was a “mutual agreement to cancel” until that issue was actually determined by the Parties. Now that there is a LEGAL DISPUTE, the Sellers’ attorney will need to determine several important issues including, but not limited to:
- Have the Buyers repudiated the Purchase Agreement by issuing erroneous cancellation documentation?
- Does the COVID-19 pandemic rise to the level of being a force majeure such that it excuses the Buyers from performing their contractual obligations in the Purchase Agreement?
- Do the Buyers have a good faith basis to cancel the Purchase Agreement?
- Should the Sellers: (a) agree to the cancellation if the Buyers give up the deposit; or (b) wait to see what will happen with the market; or (c) pursue another type of claim such as specific performance?
- Is it best to settle informally, or go to mediation, or Small Claims Court (if the dispute is less than $10,000)?
The answers to all of these and several other questions are dependent upon the specific facts of the transaction.
BEST PRACTICES:
- Agents cannot and should not make any legal assessment of the various issues involved in any legal dispute and definitely not if that dispute concerns contract cancellation and/or who is entitled to the deposit.
- Agents should refrain from preparing any cancellation documents AND to immediately urge their Clients, in an email, to consult with a qualified California real estate attorney; the Clients’ attorney should dictate the paperwork.
This Weekly Practice Tip an attorney-client privileged document 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.
© Copyright Broker Risk Management 2020 04/10/2020