QUESTION: One of our clients is cancelling their purchase. I pulled up a CAR Cancellation form online. The CAR CC looks different. Its revision date is 6/14 but the last time I used this form it was dated 11/14. I’m confused. Did I miss something? Is the CC form that is online the one that we are to use and, if so, what are the changes?
ANSWER: CAR recently made what they call a “silent revision” to their Cancellation of Contract, Release of Deposit and Cancellation of Escrow (“CC”) form. Although CAR normally does not change the date of a form when they make a “silent revision,” in this particular instance, the CC form (see attachment) was erroneously back-dated. Unlike most forms where there has been a “silent revision” to slightly change a few minor issues, there are multiple changes to the CC but this form was not issued as part of CAR’s June 2020 Forms Release.
I. What is Different in the Revised Cancellation Form?
The form is still in two sections and the headings have not changed. Part 1 deals with Cancelling the Contract and Part 2 deals with Cancelling the Escrow. There are three important revisions:
A. Old paragraph 1B (failing to remove contingencies) and old paragraph 1C (failing to take a contractually-required action) have been joined together into new paragraph 1B (failing to respond to a Notice to Buyer to Perform either a contingency removal or contractual act);
B. The warning about the penalty of up to $1,000 plus attorney’s fees for wrongfully holding up the release of funds is now in Paragraph 2 (which is where it belongs); and
C. The most important change to the form is in the last paragraph above the signature lines. In the past, signing Paragraph 2 meant that cancelling the contract and the escrow would also serve to release all claims by and against the Parties. Now, that is not necessarily true. The escrow cancellation and release of claims depends upon which boxes in part 2 get checked.
II. Cancelling the Purchase Agreement But Reserving Rights
With the new form, if either box 2A or box 2B is checked, then the release language terminating all claims by and between the Parties that has always been at the bottom of part 2 of the CC form applies – the Purchase Agreement and the escrow are both cancelled with boxes 2A and 2B.
HOWEVER, if either box 2C or 2D is checked, then there is no release of any claims; instead the Parties are agreeing to a “reservation of rights” which effectively allows the Parties to continue to fight over the deposit even though the Purchase Agreement is cancelled. What is important to note with this new “reservation of rights” language is that the escrow remains open and the deposit money just sits. This creates a new set of questions that may not be able to be answered:
A.No time limit has been established for resolving who gets the deposit so the issue of when will the deposit be released is unknown;
B. If the escrow remains open, can the Seller safely transfer title to another Buyer? In other words, will a Title Company agree to insure the subsequent Buyer’s title in the Property if another escrow is still open? and
C. What should the Back-Up Addendum state? CAR’s Back-Up Addendum specifies that the new deal is “contingent upon written cancellation of any prior contracts and related escrows.” Escrow will not be cancelled if box 2C or 2D was checked.
III. Remaining Issues with the CAR Cancellation Form
One issue in Paragraph 1 that was not changed is that box 1E states the cancellation is “per mutual agreement” which is a two-Party act but only the Buyer OR the Seller can sign Paragraph 1. This is inherently problematic and often prevents one of the Parties from agreeing to a disposition of the funds. There should be a separate set of instructions for both Parties to sign that particular choice.
Another trouble spot is box 1A which has two potential pitfalls for Agents preparing this form:
A. There is an affirmative representation that the Party seeking the cancellation is acting in good faith in exercising their rights (which itself must be stated in good faith); and
B. A choice needs to be made as to precisely which cancellation rights in the Purchase Agreement are being exercised. It is not always clear which paragraphs should be cited.
Unfortunately, the CC form still does not recommend that before signing this document that the Parties should consult a qualified California real attorney nor does it advise the Parties that since real estate Agents are not attorneys, they cannot provide any opinions as to whether or not the Parties are or are not acting in good faith.
BEST PRACTICES:
- The moment that one of the Parties to a Purchase Agreement wants to cancel, the first thing that the Agents should do is to advise their clients to consult with a qualified California real estate attorney to determine: (a) whether or not the clients can safely cancel the Purchase Agreement; and (b) who is entitled to the deposit.
- Agents should not offer any opinions on whether or not anyone in the transaction is or is not acting in good faith or who is entitled to a portion or all of the deposit. Those are legal conclusion that will be based upon many issues that the Agent may not know about.
- Agents should refrain from preparing any cancellation documentation or giving any information to the other Agent in the transaction as to why a client is cancelling until either:
(a) the client has consulted with their own qualified California real estate attorney and the Agent has received written instructions as to how the cancellation is to be handled or,
(b) after the Agent has first documented that the client is proceeding against the advice and recommendation by not securing the needed legal advice and after the client provides written instructions on how the cancellation is to be handled. Agents should not make this decision for their clients.
See Weekly Practice Tip: How to Handle Clients Who Will Not Follow Advice? (11-16-2018)
This Weekly Practice Tip an attorney-client privileged document 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 2020 07/31/20
SAMPLE FORM FOLLOWS: Click on: CAR Cancellation of Contract 6-14 Sample