BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
CANCELLING THE CONTRACT – BUYER CANCELLING
Broker Risk Management (“BRM”) has issued two prior tips regarding using CAR’s Cancellation of Contract form (CC) and cancelling the contract from the seller’s perspective. This is the third tip in this series addressing cancellation of the contract – this time cancellation by the buyer.
Purchase contracts are frequently cancelled. However, it is also one of the more risky activities in which an agent can be involved. The cancelling of a contract is a legal act and must be done carefully and in compliance with the terms of the purchase agreement and the law. Review these three tips before attempting to cancel a contract. Also, exercise special care if your brokerage is a dual agent. Finally, it is very important to be careful if the Seller wants to ratify a new contract after the cancellation, or wants to move a back-up Buyer into first position. If there is any question whether the Seller or Buyer has a right to cancel, the agent should refer the client to a qualified California real estate attorney for advice.
BUYER CANCELLING: Buyers have a right to cancel the contract for either a contractual reason, such as a contingency in favor of the buyer or a breach by seller; for a statutory reason, such as the TDS; or for newly disclosed or discovered information.
- Buyer Cancelling for a Contractual Reason: Buyers can cancel a purchase contract if there is a contingency for obtaining insurance loan and/or for an appraisal at the purchase price; or for the investigation of the property, public records, neighborhood, inspection reports, title documents or HOA or seller documents, or other investigations which reveal material facts affecting value or desirability of the property. However, the buyer must act in good faith in cancelling the contract. They cannot just change their mind.
- Buyer Cancelling for a Statutory Reason: Buyers have several statutory grounds for cancelling. For example, if a seller Transfer Disclosure Statement is required in the transaction, the buyer may cancel (if the TDS is delivered after the offer is written) within three days of receipt (five days if delivered by mail) assuming the TDS contains objectionable information to the buyer. (Note that some attorneys believe the TDS provides an absolute right to cancel, that theory contradicts the buyer’s obligation to act in good faith.) Also, in that transaction if one of the six questions on the NHD Statement is “Yes” indicating that the property is in one of the designated NHD fire, flood or seismic hazard zones, buyer may cancel.
- Buyer Cancelling Because of Newly-Disclosed or Discovered Information: If the buyer discovers new adverse material information, or such information is disclosed by seller or their agent, then buyer may have grounds for cancellation, even after removal of contingencies. However, these types of cancellations are not based on the Purchase Agreement or on statute, are very fact-specific, and buyer may have to consult with an attorney regarding their right to cancel in these cases.
Buyer Cancelling for Other Reasons – Bad Faith: Some agents advise their buyers: “Why not just put an offer on the property and tie it up. You can always cancel it later for no reason.” To take this approach with a buyer is risky for several reasons. While it is true that the purchase agreements do not expressly require that a reason must be given for terminating a purchase contract, there are several factors that agents should consider when advising a buyer to enter into a contract to purchase real property.
As to the Buyer: All parties to contracts in California have an “implied covenant of good faith and fair dealing.” This means that the parties must act in good faith and deal fairly with the other party or be accused of breaching the contract. In addition, the CAR Purchase Agreement has added a contractual requirement that the parties must exercise good faith when removing contingencies or cancelling the contract. If a buyer were to enter into a contract with no good faith intention to complete the contract, that buyer could be breaching this implied covenant, resulting in a potential allegation of breach of contract and resulting damages.
While the various purchase agreement forms do not require buyers to state a reason why they are cancelling, it is often implied that a valid reason be provided, given the obligation of a buyer to act in good faith. If the seller challenges a buyer’s cancellation, the buyer will need to establish that the buyer has a valid right to cancel, particularly if the buyer is seeking to recover the buyer’s deposit.
As to the Agent: There are three considerations for agents when advising buyers to enter into a purchase agreement:
- As stated in the Agency Disclosure, agents owe to all parties to the purchase agreement, regardless of who they represent, “a duty of honest and fair dealing and good faith.” This means that the agent for the buyer has to act toward the seller with honesty, be fair in all dealings, and act with good faith. In the real estate industry, this is often simply referred to as “bad faith.”
- The Code of Ethics of the National Association of REALTORS® in Article One states that a REALTOR’S® obligation to promote and protect the interests of their client “does not relieve REALTORS® of their obligation to treat all parties honestly.”
- California law prohibits parties in business (including agents and brokerages) from undertaking unfair business practices. Participating in or encouraging buyers to submit offers to purchase property with no intention of closing the transaction is a violation of the law.
PRACTICE TIPS:
- 1. Do not counsel buyers to enter into a purchase agreement with an intent to evade, or not comply with, the covenant of good faith and fair dealing which applies to all contracts. The results can be detrimental for the buyer and the agent.
- If your buyer is intending to cancel without a contractual or statutory reason, advise them to consult with their qualified California real estate attorney as they may be in breach of contract. For example, just changing their minds, or buyers wanting to buy a different property are not proper grounds for cancelling a contract.
- DUAL AGENCY: Remember, when you and the other agent in your brokerage are dual agents, or you are a “single agent dual agent,” you owe full fiduciary duties equally to both parties. That means you and all persons in your brokerage must be neutral. You cannot advocate, or show bias in favor of or against, either party without exposing yourself to an allegation that you have breached the fiduciary duty to the other party.
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.