BROKER RISK MANAGEMENT
RISK MANAGEMENT TIP
Several of our clients have had situations arise recently where listing agents have inadvertently sold a property to two different buyers. This tip discusses the scenarios and advice for preventing these situations.
SCENARIO NO. 1 – Seller Doesn’t Sign the Offer: Listing agent receives an offer from a buyer. The seller issues a counter offer signing the counter offer form, but does not sign the offer. The buyer signs and returns the counter offer within the timeframe required by the counter offer. Seller’s agent, not thinking that a contract has been ratified, allows the seller to accept an offer from a subsequent buyer.
DISCUSSION: All standard counter offer forms state that the terms and conditions of the offer are accepted subject to the terms of the counter offer. Therefore, the execution of a counter offer by a seller, without signing the actual offer, constitutes a binding and ratified contract once the buyer signs and returns the counter offer within the required timeframe. Thus, in this scenario, a contract was formed when the buyer signed and returned the seller’s counter offer irrespective of whether a seller signed the offer.
From a legal perspective, the first buyer would have seniority over the second buyer. If this matter were litigated, the court would award the property to the first buyer. However, the second buyer would likely have damages against the seller, who would in turn have a right to reimbursement from the listing agent.
SCENARIO NO. 2 – Not All Parties Sign the Cancellation: The property is in escrow. The buyer issues a cancellation of the contract. The seller does not sign the cancellation as the seller is contemplating whether to assert a claim to the buyer’s deposit. The seller receives a second offer, which the seller accepts without reference to the first buyer’s offer believing that that contract has been cancelled. The first buyer revokes the cancellation and asserts a right to buy under their contract. The property has now been sold twice.
DISCUSSION: As explained in BRM’s risk management tip regarding cancellation of contracts, to have a legal and proper cancellation of the contract, all buyers and all sellers must sign the cancellation agreeing to all terms including the disposition of buyer’s deposit in escrow. While purchase agreement forms allow one party to cancel the contract, it cannot be considered a fully canceled contract or escrow until all the parties have signed, because the door is still open for the first buyer to assert a right to purchase the property. In this instance, the listing agent should have issued a counter offer to the second buyer’s offer, making it subject to the mutual cancellation of the contract with the first buyer. Once the contract with the first buyer was fully executed by both parties (i.e., a mutual cancellation), the contract would be deemed properly and legally canceled. For details and a copy of the language to be inserted into a counter offer to the second buyer, see Weekly Practice Tip: “Cancelling the Contract – Re-Selling the Property After a Cancelled Escrow”
SCENARIO NO. 3 – Seller Doesn’t use a Proper Multiple Counter Form: Seller wants to issue multiple counter offers. Seller’s agent mistakenly uses two counter offers on CAR Seller Counter Offer forms (rather than the Seller Multiple Counter Offer form). Two buyers accept the counter offer. The property has now been sold to both buyers. (For PRDS forms the same result occurs if seller does not check the Multiple Counter Offer box for both counter offers.)
DISCUSSION: When issuing multiple counter offers, it is important to use the CAR Seller Multiple Counter Offer form (for PRDS forms to mark the box Multiple Counter Offer), so the seller has the ability to accept any of the counter offers agreed to by the buyers.
SCENARIO NO. 4 – Seller Receives a Second Offer After a First Counter Offer Has Been Issued: Seller receives an offer from a buyer and issues a Seller Counter Offer that expires in three days. Before the expiration of that counter offer, seller’s agent receives a second offer which seller likes and seller’s agent issues a second Seller Counter Offer. Both buyers sign and return the counter offer. The property has been sold twice.
DISCUSSION: If a seller has issued a single counter offer (for example, CAR form SCO) to a buyer, and then receives a second offer which the seller wants to either accept or counter, the first step for seller’s agent is to ask seller if seller wants to cancel the first counter offer and then either accept or counter the second offer. If seller concurs, seller’s agent should obtain seller’s instruction in writing to cancel the first counter offer. Then, contact the first buyer agent in writing (text and email) affirmatively stating “Seller hereby revokes and withdraws Seller’s Counter Offer dated _______”. Then, good practice is to confirm verbally or by voicemail that the counter offer has been revoked. Only then, after confirming that the signed counter offer has not been received back before the written cancellation was sent to first buyer’s agent, seller can either accept the second offer, issue a counter offer to the second buyer, or a seller can issue multiple counter offers to both buyers.
PRACTICE TIPS
- It is a good practice to have a seller sign both the offer, checking the box subject to a counter offer, as well as signing the counter offer. However, if a seller signs a counter offer but does not sign the offer itself, and the buyer signs and returns the Seller’s counter offer within the time specified on the counter offer, there is a ratified contract.
- If either party issues a cancellation of contract, seller’s agents need to be sure that all signatories to the purchase agreement are signatories to a mutual cancellation prior to entering into a contract with a second buyer, unless the acceptance of any subsequent offer is subject to full cancellation of the first buyer. See the reference on this topic in the Weekly Practice Tip referenced in Scenario 2, above.
- Seller’s Agents: Never issue a multiple counter offer form unless you actually have two or more offers in hand.
- If multiple counter offers are being issued, use the CAR Seller Multiple Counter Offer form. (for PRDS forms be sure the Multiple Counter Offer box has been checked.)
- Please see risk management tip regarding handling deposit disputes in the event that a party wishes to cancel a contract, but the parties cannot agree upon the disposition of a deposit. For further information on handling deposit disputes between the parties, see risk management tip “Handling Deposit Disputes.”
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication 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