Q: I represent the Buyer who is paying all cash with a 30 Day Close of Escrow. We used the new CAR RPA and all contingencies have been removed. My Buyer reviewed the Preliminary Title Report and had no concerns about the listed exclusions. Today, the Title Company issued a revised Preliminary Report which shows additional tax liens against the Property and an easement that was not listed in the original Preliminary Report. My client is upset and is considering cancelling. Is this revised Preliminary Report considered a “late delivered document?” What can I do to help my client and what recourse does my client have?
A: The new CAR RPA treats a revised Preliminary Report separately from all other documents and creates a limited, time-sensitive cancellation right. This week’s Tip will focus on the specific provision in the RPA that applies to receiving a revised Preliminary Report and the best recommended course of action for a Buyer’s Agent.
I. THE NEW CAR RPA AND ITS APPROACH TO A REVISED PRELIMINARY REPORT
A. New Paragraph 8E(2) in the CAR RPA
Paragraph 8 of the new RPA details the various contingency rights that may be included in a transaction based upon what is specified in paragraph 3L of the Grid. Paragraph 8E(1) explains that if the Agreement includes a Title Contingency in ¶3L(5), then the Buyer’s purchase is contingent upon Buyer’s ability to obtain the agreed-upon type of title insurance (specified in ¶13G) and Buyer’s review of a current Preliminary Report along with all matters disclosed in either the Preliminary Report or elsewhere by the Seller, or discovered by the Buyer from other sources.
New paragraph 8E(2) specifically deals with what happens if a revised Preliminary Report has been issued even if the Title Contingency in ¶8E(1) has been waived or removed:
“Buyer has 5 Days after receipt to review a revised Preliminary Report, if any, furnished by the Title Company and cancel the transaction if the revised Preliminary Report reveals material or substantial deviations from a previously-provided Preliminary Report.”
This is not a new contingency right and thus there is no reference to reviewing a revised Preliminary Report in ¶3L of the Grid, and it is not in the Contingency Removal (“CR”) form or in the Notice to Buyer to Perform (“NBP”).
This is a separate, contractual cancellation right that lasts for only 5 Days and it only exists if the Title Company that issued the original Preliminary Report of title has issued a new, revised report. The Buyer will need to act quickly and it is important for both the Buyer and the Buyer’s Agent to understand the proper way to determine how much time the Buyer has to exercise this cancellation right.
NOTE: This same paragraph 8E(2) is in all of the new CAR purchase agreement forms such as the RIPA and CPA but its location is different in the ABSPA and CCSPA – see ¶8F(2); NCPA – see ¶9E(2); and VLPA — see ¶8G(2).
B. Calculating the Buyer’s 5-Day Cancellation Right Period
“Days” is defined in paragraph 25J of the RPA as meaning calendar days. Based upon the definition for Counting Days (paragraph 25I), the day that a revised Preliminary Report is received by the Buyer or Buyer’s Agent — whoever is designated as being the recipient of documents — is considered Day “0.” You then count out 5 days on the calendar starting with the first day after receipt of the revised Preliminary Report. However, the last day for performance (the 5th day), cannot be on a Saturday, Sunday or legal holiday and the last day becomes the next non-weekend or non-legal holiday day.
C. Limited Contractual Basis for Cancellation
Receipt of a revised Preliminary Report from the Title Company does not create an automatic right for the Buyer to cancel. The Buyer may only cancel the Agreement if the revised Preliminary Report “reveals material or substantial deviations from a previously provided Preliminary Report.”
There is no guidance in the RPA as to what constitutes a “material or substantial deviation” in a revised Preliminary Report. Dictionary definitions of these terms provides little guidance and since this is a new contractual cancellation right, there is no California case law that specifically relates to this topic. It is thus an issue that will need to be determined by qualified California real estate attorneys, Mediators, Arbitrators and/or the Courts, but not Agents.
II. PRACTICAL APPROACH FOR BUYERS’ AGENTS
Since paragraph 8E(2) creates a limited, time-sensitive cancellation right, it is important for the Buyer’s Agent to move quickly if the Title Company issues a revised Preliminary Report. Buyer’s Agent should:
A. Read the revised Preliminary Report and the original Preliminary Report to find out what is new or different;
B. Point out the discrepancy between the two reports to the Buyer and explain to the client, preferably in an email, that the Buyer has only 5 Days to determine whether or not to cancel the contract or to take any other action;
C. If the Buyer has any questions or is in any way upset about the differences in the revised Preliminary Report, advise the Buyer in an email to first consult with the Title Officer who issued the revised Preliminary Report to get a better understanding of why the revision(s) were made and their significance to the status of title;
D. If the Buyer wants to cancel or take any other action as a result of the revision(s) in the new Preliminary Report, the Buyer should be advised in an email to consult with a qualified California real estate attorney (“QCREA”) because Agents cannot determine whether the discrepancy does constitute a material or substantial deviation; and
E. Remind the Buyer in an email that Sellers must be notified within 5 Days if the Buyer wants to cancel.
PRACTICE TIPS:
- Receipt of a revised Preliminary Report triggers a possible new Buyer cancellation right and Buyers’ Agents must act quickly in following the steps outlined in Section II above. It is important that the right advice is provided to the Buyer as quickly as possible and that the steps outlined above should be documented in the Broker file.
- If a revised Preliminary Report is issued, a Seller’s Agent should warn the Seller that the Buyer may have a 5-Day cancellation right; if a Seller has any questions or concerns, the Seller should consult with the Seller’s own QCREA especially on the issue of whether or not the Buyer can legitimately cancel the Agreement.
- Regardless of who an Agent represents, Agents should not provide any opinion as to whether or not any revised Preliminary Report does or does not create a legitimate basis for the Buyer to cancel.
- If a revised Preliminary Report is issued and the new CAR RPA was not used (e.g., an older version of the CAR RPA was used or either the PRDS or SFAR contract forms was used), Buyers’ Agents should still follow the steps in Section II above but do not reference paragraph 8E(2) or the 5 Day time limit; the Buyer’s QCREA will need to determine what remedies may be available.
ATTORNEY-CLIENT PRIVILEGED COMMUNICATION: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is 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 2022 1/28/2022