This is a three-part Weekly Practice Tip series on Cancelling the Contract. The three Tips are: “Seller Cancelling,” “Buyer Cancelling,” and “Re-Selling the Property After a Cancelled Prior Contract.”
Purchase contracts are cancelled every day. However, it is also one of the most dangerous 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. Review these 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.
RE-SELLING PROPERTY AFTER A CANCELLED PRIOR CONTRACT
If ALL parties have signed a MUTUAL cancellation of the PURCHASE AGREEMENT, not just the escrow, then it is safe to re-sell the property to a second buyer.
However, if there is no signed mutual cancellation of the contract, then you must proceed with caution.
Note that paragraph 1 of the CAR Cancellation of Contract (CC) form provides for three types of cancellation: (i) seller cancelling; (ii) buyer cancelling or (iii) a mutual cancellation. If either the box for seller or buyer cancelling is checked, and that document is delivered to the other side, then, assuming proper grounds for cancellation and that the required notice to the other party has been delivered, the contract is cancelled…..
BUT…. The other side has not agreed to this cancellation and may argue that the cancelling party had no right to cancel, challenging the cancellation on contract grounds, or on “equitable” or non-contractual grounds (such as “Substantial good faith performance,” “Fraud,” Interference with performance,” etc.)
In the instance where the seller has cancelled using the CAR CC form checking the box for Seller cancelling, then there exists the possibility that the buyer may object, challenging the right of the seller to cancel and threatening to file a suit for Specific Performance (asking the court to deliver title to buyer,) and to record a lis pendens. Such allegations must be taken seriously and sellers must be referred to their attorney for advice.
NOTE: A lis pendens (literally, a “notice of pending action”) can only be recorded against a property if the party who filed a suit is making a claim to title or possession, such as a suit for specific performance.
However, often after the CC is delivered to buyer, there is no immediate response from buyer, or buyer is merely trying to obtain the return of their deposit. And, of course, seller wants to sell to a second buyer, or move a backup buyer into first position.
In this scenario, a seller can re-sell the property to the second buyer but must do so carefully:
- First, seller should be advised to discuss this with their qualified California real estate attorney. Also, seller should be made aware that, until there is a mutual signed cancellation of the contract, that first buyer may change their mind and try to come back alleging a right to buy the property.
- Second, while a seller can re-sell the property and open a new escrow, the new escrow cannot be with the same escrow company. No escrow company can open two escrows on the same property at the same time for two different buyers.
- Third, if you receive a new offer on the property that the seller wants to accept, you want to make sure that seller will be able to deliver title at the close of escrow to that second buyer. Occasionally, the first buyer (or their attorney) will switch their claim for the deposit to a claim that they have a valid purchase contract and now claim a right under the purchase agreement to buy the property. If a lis pendens were then recorded against the property by the first buyer, seller would not be able to deliver title to buyer number two, and could be in default on their contract with buyer number two.
PRACTICE TIPS:
- It is always best to get a mutual written cancellation of the first contract by both parties before entering into a contract with another buyer.
- If that is not possible, and if the first buyer is merely seeking return of the deposit, and if seller wants to ratify a contract with buyer number two, then refer seller to a qualified California real estate attorney. And, if seller is proceeding with the second buyer, you’ll need to strongly recommend that seller add the contingency language on the last page of this Tip in a counter-offer to buyer number two. – See the Practice Tip 10, below, for proper language/format.
- If a seller is refusing to add to the contract number two with buyer number two the contingency for the mutual cancellation of the first contract, advise seller IN WRITING that this is against your strong advice and should only be done upon advice of sellers’ own qualified California real estate attorney.
- Buyer number two may be concerned that s/he will incur expenses (inspections, etc.) and want to be reimbursed if his/her contract is terminated. That can be handled by the addition of the second paragraph of the clause on the next page.
- This contingency in favor of seller can be waived by seller if buyer and seller agree on a mutual cancellation of that first contract or, right at close of escrow, buyer number one is not making a claim to title or has gone away.
- Legal and Strategic Decision: If seller wants to attempt to keep the first buyer’s deposit, the seller has to make both a legal and a strategic decision.
- The legal decision is whether the seller has a right to keep the deposit, and possibly other damages if Liquidated Damages does not apply. For this determination, refer your seller to seller’s own attorney.
- However, there is also a strategic decision that you can help sellers with. Point out to the sellers that if there is no mutual cancellation of the purchase agreement, sellers will be advised by you to place into contract number two with buyer number two the clause on the last page of this Tip. From a marketing perspective, this has a dampening effect on buyer number two, who may not want to enter into a contract where seller has a right to cancel all the way up to the close of escrow. A seller should consider this possibility in the decision whether to pursue a claim against the first buyer for the deposit, or simply to obtain a mutual release and return buyer number one’s deposit, thus clearing the way for the second contract with the second buyer.
- If there is a back-up buyer whom seller wants to move into first position, only do so in writing when and if:
- You have a signed mutually-cancelled contract and escrow from the first buyer; or,
- You add the clause below making seller’s obligation to sell subject to obtaining that mutual cancellation from the first buyer.
- Never tell a back-up buyer verbally that they are in first position. Limit your statements to back-up buyer’s agent to something like: “We are in the process of attempting to obtain the cancellation of the first contract. We will notify you in writing when, and if, your client is in first position.”
- DUAL AGENCY: Remember, when you and the other agent are dual agents, or you are a “single agent dual agent,” you owe full fiduciary duties 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. See Weekly Practice Tip “Dual Agency Issues.”
- Language to be Inserted in the Purchase Agreement with a Second Buyer when a Seller has not Received a Mutual Cancellation of the Prior Purchase Agreement
“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. In the event that seller, in seller’s sole discretion, determines that it will be unlikely or impossible to obtain that release and cancellation in a timely fashion, 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 this 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. Seller also has the sole right to waive this condition in writing at any time with written notification to buyer that buyer is in primary position. The parties are advised to have this provision reviewed by their own qualified California real estate attorneys prior to signing this agreement.”
Optional:
“Should Seller terminate this Purchase Agreement pursuant to this paragraph, Seller agrees that Seller will reimburse Buyer’s actual costs for inspection reports (up to a maximum of $_________).”
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