Q: Can you provide us with an Addendum to put a Buyer into a Back-Up position along with some guidance to help avoid problems when there is no mutual cancellation of a prior Purchase Agreement?
- Yes. Re-selling a property when there is no mutually-consistent cancellation of the prior agreement is highly problematic for Sellers and their Agents. The best practice is to clearly put any new Buyer in a Back-Up position with a proper agreement regarding how and when the Back-Up Buyer will be moved into primary position.
Although C.A.R. has a Back-Up Addendum, our recommendation is to use the Back-Up Addendum which follows on page 3 because it has the following key provisions:
- It sets up a Contingency that the Seller is not obligated to sell the Property unless, in Seller’s sole discretion, there is a mutually agreed-upon release and cancellation of the prior transaction;
- It enables the Seller to waive the Contingency but warns the Seller to only do so after obtaining advice from a qualified California real estate attorney;
- The default timing is that the Back-Up Buyer’s obligations under the Purchase Agreement starts with Acceptance of the Agreement; however, the Parties can agree that the time frames start after the Back-Up Buyer is moved into primary position;
- It enables the Seller to continue to negotiate with the prior Buyer and, most importantly, the Addendum makes it clear that the Seller is not obligated to secure a cancellation of the prior transaction;
- It enables the Seller to more easily cancel the Back-Up Buyer without the need for any Notice to Perform and without any liability to the Back-Up Buyer; and
- It recommends that both Parties secure advice from a qualified California real estate attorney prior to signing the Addendum.
As a reminder, whether a Purchase Agreement has been cancelled or terminated is a legal determination under Standard of Practice 1-8 which provides, in part:
“REALTORS®, acting as agents or brokers of buyers/tenants, shall recommend that buyers/tenants obtain the advice of legal counsel if there is a question as to whether a pre-existing contract has been terminated.”
This ethical provision really should apply regardless of who the Broker represents and to prove that the Broker has met this obligation, the advice should be provided to the client in writing, such as with an email.
PRACTICE TIPS:
- DO NOT re-sell a Property or move a Back-Up Buyer into first position unless and until there is a mutual cancellation of the prior contract and the escrow. If Seller cannot or will not obtain mutual cancellation of the prior contract and the escrow, it is essential that the Agent proceed with caution. See Weekly Practice Tip re Cancelling the Contract.
- DO NOT simply indicate in a Counteroffer that the new Buyer is “in Back-Up”. This short-hand phrase does not deal with all of the problems that may arise with a Back-Up Buyer. The best practice is to use the attached Back-Up Addendum.
- URGE SELLERS to consult with a qualified California real estate attorney to determine (a) whether there is a full and complete cancellation of the prior transaction and/or (b) whether or not it is safe to proceed with the Back-Up Buyer if the prior transaction has not been completely cancelled.
This Weekly Practice Tip an attorney-client privileged document and 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 2018 Broker Risk Management 12/14/2018
FORM FOLLOWS:
BACK-UP ADDENDUM
The following terms and conditions are hereby incorporated into and made a part of the Purchase Agreement dated ___________ on the property located at _____________________________
(the “Property”) in which ______________________________ is referred to as the Buyer and ______________________________ is referred to as the Seller. Buyer and Seller are collectively referred to as the “Parties.”
The Parties agree that Seller’s obligations in this Agreement, including but not limited to closing escrow and delivering title to Buyer, are specifically contingent upon Seller first receiving a written, mutually agreed-upon release and cancellation of a prior purchase contract on the Property from a third-party purchaser.
Seller has the sole right to waive this Contingency in writing, at any time, with written notification to Buyer that Buyer is in primary position. Seller is cautioned to only waive this Contingency after first securing the advice of a qualified California real estate attorney.
All of Buyer’s obligations, including but not limited to depositing funds, removal of contingencies and closing escrow specified in the Agreement, shall commence as of the date of Acceptance OR (if checked) □ one Day After Buyer receives written notification from Seller that there is a written, mutually-agreed upon release and cancellation of the prior purchase contract or one Day After Buyer receives written notification from Seller that this Contingency has been waived.
The Parties understand, acknowledge and agree that Seller is not obligated to secure a written, mutually agreed-upon cancellation of the prior purchase contract and that Seller may continue to negotiate and work with the prior purchaser to close escrow on that transaction, in Seller’s sole discretion.
In the event that Seller, in Seller’s sole discretion, determines that it will be unlikely or impossible to obtain a release and cancellation of the prior purchase contract in a timely fashion, then Seller will have the right, without the necessity of issuing any type of prior notice to Buyer, including but not limited to a Notice to Perform, to notify Buyer that this Agreement is cancelled.
The Parties understand, acknowledge and agree that in the event Seller exercises the Seller’s right to cancel, that Seller may do so without any liability to Buyer and the Parties shall promptly instruct escrow to release Buyer’s deposit, if any, to Buyer.
The Parties are advised to have this Addendum reviewed by their own qualified California real estate attorneys prior to signing this Agreement.
The foregoing terms and conditions are hereby agreed to, and the undersigned acknowledge receipt of a copy of this Addendum.
Date _______________________ Date___________________________________
Buyer_______________________ Seller___________________________________
Buyer_______________________ Seller___________________________________