Q: Not long after being the winning buyer in a multiple offer situation, my client suddenly wanted to cancel her contract. She consulted with an attorney who informed her that she was not acting in “good faith” as required by the Purchase Agreement because she had waived all of her contingencies and she had no cancellation rights. Can you please explain what is meant by “good faith”?
A: In every contract or agreement there is an implied promise of good faith and fair dealing. This implied promise means that all of the Parties to that contract will not do anything to unfairly interfere with the right of any other party to receive the benefits of the contract. In the standard real estate purchase agreement forms used in California, the implied promise of “good faith” has been elevated to an actual contract obligation of both Parties.
“Good faith” means honesty of purpose without any intention to mislead or to take unfair advantage of another. Generally speaking, it means being faithful to one’s duty or obligation. “Good faith” is a legal term that cannot be easily determined – lawyers often argue as to whether or not a party has acted in good faith (or its opposite, “bad faith”) and the final determination of that issue is left to judges, arbitrators or juries.
If a Buyer is accused of violating the duty to act in good faith, the Seller must prove all of the following elements to prevail in a lawsuit or arbitration (the same would be true if the Seller is accused of violating the duty to act in good faith):
- That the Parties entered into a contract;
- That Seller did all, or substantially all, of the significant things that the contract required of the Seller or that the Seller was excused from having to do those things;
- That all conditions required for Buyer’s performance had occurred or were excused;
- That Buyer’s failure to perform prevented the Seller from receiving the benefits of the sale;
- That by failing to perform, the Buyer did not act fairly and in good faith; and
- That Seller was harmed by Buyer’s actions or inactions.
Because of the complexities of legally establishing “good faith,” real estate Agents should not attempt to make that determination. The 2021 CAR Residential Purchase Agreement form (due to be released Fall, 2021 for training) states in Paragraph 14H,entitled, “Effect of Cancellation on Deposits,” states:
Note: Agents are not qualified to provide any opinion on whether either Party has acted in good faith or which Party is entitled to the deposited funds. Buyer and Seller are advised to seek the advice of a qualified California real estate attorney regarding this matter.
PRDS provides comparable warnings in its Cancellation of Contract Advisory that is due to be released in April, 2021. SFAR will also have a Termination of Contract Advisory that is due to be released in June, 2021.
PRACTICE TIPS:
- Whenever clients wish to cancel a Purchase Agreement, Agents should not provide any legal advice of any kind; the clients should be encouraged, in writing, to consult with a qualified California real estate attorney before preparing any cancellation documents.
- Agents should not give any opinions about, or attempt to determine, any of the following issues:
(a) The potential legal and financial consequences of either Party cancelling;
(b) Whether either Party is acting in good faith; and
(c) Who is entitled to any of the funds deposited into escrow.
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.
© Copyright Broker Risk Management 2021 03/26/21