BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Broker Risk Management (“BRM”) has received a number of inquiries recently regarding the proper cancellation of a California Association of Realtors’ Residential Purchase Agreement (“RPA”) if one of the parties is not performing. The primary question is whether a unilateral cancellation by a buyer or seller is effective to cancel the entire contract. There appear to be differing views among attorneys. The following discusses BRM’s recommended practices.
QUESTION NO. 1: I am a listing agent. The seller accepted an offer and escrow was opened. However, the buyer did not submit the initial deposit into escrow. A Notice to Perform was issued, but the deposit still has not been made. The seller signed the cancellation contract. Can I place the property back on the market and, if so, how should I proceed?
RESPONSE: You may place the property back on the market, but the seller should not accept an offer unless the buyer signs the cancellation of contract or the offer is accepted contingent upon the first buyer cancelling. Pursuant to the law, it takes all parties enter a contract; it also takes all parties to cancel a contract. CAR’s RPA does not have a unilateral provision allowing one party or the other to cancel the contract without the written consent of all parties. If the other party refuses to sign the cancellation, such as the buyer in this situation, the seller can put the property back on the market and accept another offer subject to receipt of cancellation by the buyer. If the buyer continues to refuse to sign the cancellation, the seller should retain qualified California real estate attorney to contact the buyer and to advise the seller on the risks of moving forward with selling the property to a second buyer without a mutual cancellation by the first buyer.
QUESTION NO. 2 – Same as Question 1, but after seller put the property back on the market, the seller accepted another offer and now the first buyer has returned, claiming that there were legitimate legal reasons why the buyer did not perform and the first buyer is seeking to enforce the RPA.
RESPONSE: At this point, the seller has accepted two valid offers to purchase the property. A court could find that the first offer was the proper and successful buyer since that buyer entered a contract before the second buyer. If that occurs, the second buyer could seek monetary damages for any lost profit or expenses affiliated with losing the property.
QUESTION NO. 3: Same as Question 2, but after the second offer was accepted, the seller opened a second escrow with another escrow/title insurance company. We have not told the second escrow company about the first escrow. What are the risks?
RESPONSE: Unfortunately, arguably, the property has now been sold twice and the parties have committed a fraud on the second title insurance company creating an additional liability to the title insurer. A title insurer insures title that includes a guaranty that the seller has clear title to sell to the buyer. If escrow closes with the second buyer and the first buyer asserts a claim against the property, sues and records a Notice of Pendency of Action (lis pendens), the second title company will be forced to defend the second buyer. However, the second title company will likely sue the seller and real estate agent for fraud and misrepresentation.
QUESTION NO. 4: I am the listing agent. The buyer did not timely remove their contingencies and the seller issued a Notice to Perform. When the buyer still did not remove their contingencies, the seller issued a cancellation of contract. The buyer has now removed their contingencies and requested that the sellers withdraw the cancellation. If the seller chooses to move forward with the contract with the buyer, can the seller withdraw their cancellation and reinstate the contract?
RESPONSE: Yes. Because the cancellation requires the buyer’s signatures to be effective, it can be rescinded by the seller and the RPA reinstated.
PRACTICE TIPS:
- If a Cancellation of Contract is not signed by all parties, a second offer should not be accepted by sellers unless it is subject to cancellation of the first offer.
- If a party is failing to respond to cancellation, the party seeking cancellation should consult with a qualified California real estate attorney.
- If a buyer is not signing a cancellation from seller, seller should not secretly change title companies as it exposes the seller and agents to a claim by the title insurance company.
- If a buyer is not signing a cancellation issued by seller, and seller desires to put the property back on the market subject to the cancellation of the first purchase agreement, consult with your manager or broker for proper language and advise seller to consult with a qualified California real estate attorney.
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 LLP. 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 practice.