BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
We recently received a call from an appraiser employed by a local bank. He advised us that in the last six weeks, the sales prices and values of homes in Northern California have declined as much as 20% in some areas. He was quite surprised by the abrupt change in the market.
There are a number of legal issues arising out of this quick change in the market. Please note the following scenarios:
Scenario No. 1: Buyer and seller are in escrow. Buyer has removed all of buyer’s contingencies. Buyer gets “cold feet” due to the abrupt change in the market. Buyer now seeks to cancel the contract and requests the return of buyer’s earnest money deposit. Does buyer have a right to cancel the contract? How should the agents handle this situation?
Answer: The buyer has no contractual right to cancel the contract without being in breach of the contract. However, if the buyer does cancel, there may be legal consequences for that cancellation. If the liquidated damages provision of the Residential Purchase Agreement (“RPA”) was initialed, the buyer’s damages owed to the seller are capped at the deposit. The parties should be referred to a qualified California real estate attorney to address the disposition of the deposit. However, if the parties can agree the contract should be mutually canceled as soon as possible to get the property back on the market to minimize potential future damages.
Scenario No. 2: Buyer and seller are in escrow. Buyer waived buyer’s appraisal contingency. Given the decline in the market, the property did not appraise at the sales price. The buyer has a loan contingency in place, but the buyer does not have sufficient funds to make up the difference between the sales price and the appraised value. Can the buyer cancel the RPA?
Answer: If a CAR purchase agreement was used, the buyer cannot utilize the low appraisal as a reason for not obtaining the loan, and cannot cancel using the loan contingency. Buyer likely cannot recovery the buyer’s deposit unless there is another basis for cancelling. As in Scenario No. 1, if the buyer seeks to cancel the contract, the contract should be immediately cancelled, with the deposit remaining in escrow if the parties can agree to do so. The parties should be referred to qualified California real estate attorney for advice regarding handling.
Scenario No. 3: I am the listing agent. The buyer cancelled the contract. The deposit is $10,000. The buyer is willing to give the seller the deposit. However, the property has declined in value by more than $200,000 since the execution of the RPA. Can the seller seek additional damages?
Answer: If the liquidated damages provision is initialed, the seller will likely be unable to recover any additional damages other than the buyer’s deposit. That is the point of a liquidated damages provision — it presets damages in the event that the buyer defaults. In a declining market, a liquidated damages provision benefits the buyer. In an increasing market, the liquidated damages provision benefits the seller.
Scenario No. 4: Buyer and seller are in escrow with no buyer contingencies. Due to the market decline, the buyer seeks to cancel the contract. The buyer is requesting the return of the buyer’s deposit because a completed Transfer Disclosure Statement and listing agent’s AVID have not been delivered to the buyer. Does the buyer have a right to cancel? Does the buyer have a right to recover buyer’s deposit?
Answer: If this is a transaction where the seller is obligated to deliver a TDS to the buyer, the buyer has a right to cancel. Likely, the buyer can recover buyer’s entire deposit given the automatic right of rescission pursuant to Civil Code §1102.6. (That statute provides that a buyer has a right to cancel the contract three days from personal delivery of the TDS or five days if the TDS is delivered by email or mail.)
PRACTICE TIPS
- If a buyer seeks to cancel the contract, have the parties try to arrange for immediate cancellation and get the property back on the market as soon as possible to limit the seller’s damages. That way, the deposit remains in escrow and the parties can separately address the handling of the deposit.
- Buyers making offers in today’s market should seriously consider whether waiving an appraisal contingency is appropriate.
- Do not advise your clients on whether they are entitled cancel the contract or to recover the deposit. That is providing legal advice and can lead to liability.
- The CAR Cancellation of Contract form states: “Agents are not qualified to provide any opinion on who is entitled to the deposited funds or whether a cancellation was made in good faith. Buyer and Seller are advised to seek the advice of a qualified California real estate attorney regarding this matter.”
For additional information on cancelling the contract and re-selling the property see Tips:
190111 Cancelling the Contract – Buyer Cancelling
190118 Cancelling the Contract – Re-Selling the Property
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.