Q: We represent the Buyers whose Offer was accepted yesterday. Today the Buyers told me that they have had “a change of heart” about how the deal was structured. The Buyers informed me that if they cannot get the Sellers to change the agreed-upon terms to be more beneficial to the Buyers, they want to cancel. The Listing Agent has already told me when the Sellers accepted our Offer without a Counter that these Sellers are adamant that they do not want to negotiate any issues. I want to call the Listing Agent (who is a friend of mine) to let him know that the Buyers insist that if they cannot change certain terms, they will back out of the deal. Is that ok? What should I do now? How should I prepare the Cancellation form?
A: At this point, the best thing that you can do for the Buyers is to say nothing to the Listing Agent and do not prepare any cancellation documents.
When Buyers or Sellers change their minds about contract terms that have been agreed to, in writing, and/or they decide that they do not want to proceed with a real estate purchase agreement, the last thing that their Agent should do is to notify the other Agent in the transaction (either orally or in writing) that the clients have “changed their minds” or had a “change of heart” or “will not proceed unless the contract terms are renegotiated.” Since conveying that information to the other side of the transaction can be used against the Agent’s own client, the mere act of telling the other side that the Clients do not want to perform as previously agreed could expose the Real Estate Agent to a claim of breach of fiduciary duty.
I. Good Faith Requirement:
Under long-standing common law principles, all Parties to a contract must act in “good faith” when performing every aspect of the agreement including, but not limited to, performance of all contractual obligations, such as removal of contingencies, providing agreed-upon documents and closing escrow. Even efforts to cancel the contract must be performed in good faith and thus Agents must act with caution when their Clients indicate that they want to cancel.
All standard residential Purchase Agreement forms (CAR, PRDS and SFAR) specify that the Parties must act in “good faith” when exercising any cancellation rights. It should also be noted that there is, as a matter of California case law, no legitimate basis to unilaterally terminate the contract at the whim of either Party. Thus, merely by telling the other Party’s Agent that your client does not want to perform the contract in whole or in part, can be used to prove that your client was acting in “bad faith” and arguably breaching the contract.
If an Agent has informed, implied or even just hinted to the other Agent that their Client is acting in “bad faith,” then that information can be used to determine what damages the Client may have to pay or may be able to recover as a result of their “bad faith.” The Agent’s words will also most likely be used to determine whether the Client will have to pay the other Party’s attorney’s fees and costs. If it is determined that the Client was acting in “bad faith” because of any information conveyed by the Agent, the Client will undoubtedly end up looking to their own Agent to reimburse them for their losses.
II. Anticipatory Breach of Contract or Repudiation of Contract
Communicating the Client’s intent to cancel (when there is no “good faith” exercise of a contingency or contractual cancellation right) or the Client’s intent to not perform a contractual obligation may trigger a claim of Anticipatory Breach of Contract that can be financially dangerous to both the Client and the Agent.
Anticipatory Breach of Contract occurs when one Party to a contract by words or actions (either their own or their Agent’s) indicates an intent to not perform contractual obligations. Letting the other Agent know that the Client is intending to cancel because they changed their mind is an example of possible Anticipatory Breach of Contract. At that point in time, the other Party can immediately claim that they are entitled to recover breach of contract damages even though there has been no actual attempt to cancel.
Repudiation of Contract occurs when one Party unequivocally lets the other Party know by words or actions (either their own or their Agent’s) that they will not perform contractual obligations. Delivery of a Cancellation form to the other Party or taking any action which makes it impossible for the other Party to perform, such as preventing inspections or an appraisal, are examples of possible Repudiation of Contract.
If the Agent’s words or actions are used to establish either Anticipatory Breach of Contract or Repudiation of Contract by the Agent’s client, the Agent will then face the prospect of a claim of breach of fiduciary duty and could well be required to reimburse the Client for all of their financial losses.
III. What Should Agents Do When Clients State That They Want to Cancel?
Unless the Client is, in good faith, exercising an actual contingency or contractual cancellation right, the Agent should not do any of the following:
- Give any opinions to Clients as to whether anyone can safely cancel.
- Give any opinions to Clients as to whether they or the other Party is acting in “good faith” or “bad faith.”
- Give any opinions as to who is entitled to the deposit.
- Call, text or send an email to the other side regarding the Client’s intent to cancel or actual cancellation.
- Prepare any type of Cancellation documents.
The only thing that the Agent should do when the Client indicates a desire to cancel because they have “changed their minds” or “had a change of heart” or “will not proceed unless the agreed-upon contract terms are renegotiated,” is to immediately advise the Client in an email that before anything else is said or done, the Client should consult with a qualified California real estate attorney to aid the Client in safely terminating the contract.
Practice Tips:
- Unless the Client is, in good faith, exercising an actual contingency or contractual cancellation right, the Agent should say or do nothing but recommend, in writing, that the Client needs to consult with a qualified California real estate attorney to protect their interests.
- If the Client refuses to consult with a qualified California real estate attorney, then document that the Client is not following the Agent’s advice.
See Weekly Practice Tip: Handling Clients Who Will Not Follow Advice (11/16/18)
- If the Client demands that the Agent prepare a Cancellation form, consider not using Section 1 of the CAR Cancellation form to indicate the basis for cancelling the Contract and simply use Section 2 to specify how the escrow funds are to be distributed and to release all claims.
WEEKLY PRACTICE TIP: 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.
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