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Guest Blog – RHRC Legal Update # 113 by David Hamerslough

Last month’s article discussed the impact of communications taking place between agents after an offer or counteroffer was made but before a purchase contract was ratified. Here, we will examine the potential impact of what is said and/or done by the parties or their agents after there is a ratified contract but before close of escrow.

What is said or done in this timeframe can bring into play the concepts of anticipatory breach of contract and repudiation. Anticipatory breach occurs when a party to a contract by words or actions (either their own or their agent’s) indicates an intent to not perform the contract before that party’s performance is due under that contract. A repudiation occurs when a party, by words or actions (either their own or those of their agent’s), indicates that he or she will not perform or cannot substantially perform any or all of the essential terms of the contract. Repudiation may be express or implied. An express repudiation is a clear, positive, unequivocal refusal to perform. An implied repudiation results from conduct where a party effectively prevents certain acts or events from occurring so as to make substantial performance of its promise impossible.

What acts and/or words constitute either an anticipatory breach or repudiation depends upon the specific facts of the transaction. If a buyer, for example, expresses to their agent that they no longer want to move forward with the purchase and that intent is communicated to the seller’s agent and/or the seller (by any means, including text or email), that communication may constitute an anticipatory breach/repudiation where there is no good-faith exercise of a contractual basis for that party not to perform (e.g., a contingency removal or other contractual cancellation right). Delivery of a cancellation form, in the absence of a justifiable basis for cancelling the contract, may be another example of an anticipatory breach/repudiation. An example of this scenario that occurred with some regularity earlier this year was the delivery of signed cancellation instructions from buyers based on COVID-19 when there was no actual causal connection between the buyers’ ability to perform and a COVID-19 issue.

Unfortunately, not every act or statement demonstrates a clear case of anticipatory breach/repudiation. Communications that are ambiguous or uncertain as to the party’s intention and are merely threats not to perform may not rise to the level of anticipatory breach/repudiation. Good-faith disputes about contract terms may also be insufficient to establish anticipatory breach/repudiation. On the other hand, imposing new terms or conditions on the other party, either on their own or in conjunction with an offer to perform, may constitute a refusal to perform and therefore an anticipatory breach/repudiation.

The statements and/or acts of the party (or their agent) in response to receiving a communication that may constitute a repudiation may also be significant. When a party actually repudiates a contract, the other party faces an election of remedies. They can treat the repudiation as an anticipatory breach and immediately seek damages for breach of contract; in that case, the contract between the parties would be terminated. Alternatively, the injured party can ignore the repudiation and wait until the time for performance arrives and thereafter exercise any available remedies for actual breach, if in fact a breach does occur at that time.

If, however, the injured party ignores the repudiation and treats the contract as still being in force and the repudiation is retracted prior to the time of performance, then the repudiation is nullified and the injured party is left with the remedies, if any, that may be available at the time of performance. An example would be a situation in which a party accepts performance by the repudiating party with knowledge of the anticipatory breach/repudiation; doing so constitutes a waiver of the prior anticipatory breach/repudiation. On the other hand, if the injured party has relied to its detriment on the anticipatory breach/repudiation, a retraction by the repudiating party may not nullify the effect of the repudiation.

Given the significance of the parties’ and their agents’ words and conduct with respect to these issues, the following are some practical considerations to take into account if a buyer or seller expresses a desire to not continue with a transaction or otherwise not perform their contractual obligations or your client receives a communication expressing such a position:

Immediately advise the client (preferably in writing, such as an email) to consult with a qualified California real estate attorney before any communication is made or any action is taken in response to the other party or their agent. Any party can breach a contract, provided they are willing to accept the consequences of that breach. The type and nature of those consequences are best explained by a qualified California real estate attorney.
There may be other factual, legal, and/or equitable grounds for a client to cancel or otherwise not perform that the agent may not be aware of at that time. If the intent to cancel or not perform is communicated before the client has the opportunity to consult with a qualified California real estate attorney, then the client may be precluded from potentially canceling the contract in good faith or not perform its contractual obligations.
Avoid providing the client with any opinion on (1) whether the client can or cannot safely cancel or otherwise not perform, (2) whether a client would or would not be acting in good or bad faith were they to do so, (3) whether they would or would not be entitled to the deposit or some other contractual remedy, (4) whether the other party has or has not performed a contractual obligation that would otherwise justify a cancellation in response to the acts or statements of the other party, and (5) what any response should be given to a purported repudiation. The potential risk of doing so is that the evaluation of these issues by either the client or the client’s agent may be incorrect and/or may commit a party to a position that is not factually, legally, or equitably sound.
Any communications, oral and/or electronic, between the agents, the agents and their clients, and the agents and third parties (e.g., lenders, escrow officers, etc.) will be scrutinized by the lawyers in any deposit dispute claim to determine whether there has been an anticipatory breach/repudiation and/or the impact of any response to the purported anticipatory breach/repudiation. These communications will be reviewed with a focus on whether a party or their agent is acting consistently with the position they are taking in the claim as well as how the agents and their clients understood or interpreted any such communications, the timing of those communications in relationship to other statements and actions, whether subsequent actions and statements were reasonably taken and made in reliance on what the other party had communicated, etc. Any analysis will also include assessing which party has acted reasonably and fairly and whether the communications between an agent and client are consistent with what has been communicated to the other agent and/or parties.

The fact that a party may have cancellation rights in a purchase contract is not a guarantee that they can safely cancel without any financial or legal risks. It is therefore important that agents document that they have advised their clients to consult with a qualified California real estate attorney and that they gave their clients that advice at the right time.

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