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.
SELLER CANCELLING
Sellers have a contractual right to cancel the contract for the failure of the Buyer to comply with the contract obligations, including close of escrow, or failing to timely remove a contingency. But, it is always important for a Seller to completely comply with the Notice to Buyer requirements of the Purchase Agreement.
Has the Buyer failed to perform?
Sometimes it is quite obvious that a Buyer has failed to perform according to the requirements of the Purchase Agreement. For example, if the Buyer has not removed a contingency on time when Seller has done everything Seller was required to have done. Other times, it may appear that the Buyer has not performed by, for example, failing to remove a financing contingency, when the Buyer is not at fault; such as if a Buyer alleges that Seller was late in letting the appraiser onto the property, or that the real problem lies not with the Buyer but with the lender who is slow.
Quite frequently in a situation where a Buyer challenges Seller’s right to cancel, Buyer will retain an attorney who will argue on various grounds, for example in the situation above, that the Buyer “substantially performed in good faith” and failure to perform is not their fault. The attorney may threaten a specific performance suit to compel Seller to sell to the Buyer, and threaten to record a “lis pendens” (a notice of a pending action alleging a right to title or possession), which would effectively stop the Seller from selling to any third party.
This will force the Seller to retain an attorney to respond. Quite often, in these contested situations, experience shows that the Seller ends up selling to the first Buyer anyway after much expense, frustration and delay on all sides.
The Buyer is “Out of Contract”
The expression “Out of Contract” is not a legal term, but is merely an industry term denoting a failure to timely remove a contingency or to timely close escrow. A contract is not cancelled just because a party is “out of contract.” Instead, the time for performance of a contingency or close of escrow simply continues until Buyer or Seller takes the appropriate action. Such a Purchase Agreement is then merely “cancellable,” meaning either party may thereafter cancel the contract after complying with the contractually-required Notice to Perform or, in the case of a CAR Purchase Agreement, Demand to Close Escrow. If you and your client believe that the other party is “out of contract,” and your client wants to terminate the contract, your client must take the affirmative step of cancelling the contract in writing.
PRACTICE TIPS:
- As brokers, we cannot give legal advice, and therefore must err on the side of caution. Advise your Seller that there may be risks to cancelling the contract and that there may be other options to consider such as extending the contract a few days. Of course, the final decision is up to Seller.
- If Seller still wishes to terminate, recommend that s/he do so with the advice of a qualified California real estate attorney. If the Seller still wishes to proceed, document the file and, if the CAR Purchase Agreement is used, issue the Cancellation of Contract (zipForms form CC). (Note: If using the PRDS Purchase Agreement, see PRDS form “Cancellation of Contract.” If using the SFAR Purchase Agreement, use the SFAR “Termination of Agreement and Release of Deposit.”)
- If you issue the cancellation but there is no signed mutual cancellation of contract, and your Seller wants to immediately move the back-up Buyer into first place, see Weekly Practice Tip: “Re-Selling the Property after a Cancelled Prior Contract.”
- 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 for, 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.”
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 Broker Risk Management 2019 1/04/19