Will The Cancellation Epidemic Ever End?
This month’s article highlights the legal claims and issues that were most prevalent in the month of March. I’d like to tell you that this was all an April Fool’s joke, but the most common claim involved cancellations by buyers and disputes over the deposit (in those cases where a deposit was actually paid).
For whatever reason, buyers continue to cancel ratified contracts that were written without any contingencies and without any deposit being paid. They also continue to do so without consulting a qualified California real estate attorney before taking these potentially drastic actions.
The two primary reasons for these cancellations are that the buyer is unable to obtain the institutional financing that they hoped would be available to close the transaction and/or the buyer develops cold feet about moving forward at the purchase price.
Last month’s article discussed issues with buyer’s stated financing and the attempt to close the escrow with alternative financing. Unfortunately, that type of claim still persists, so please refer to that article for a discussion of this subject and issues to take into consideration when writing an all-cash offer or an offer without a loan contingency.
When a buyer gets cold feet, they (or their attorney) typically look for a common-law right to rescind the transaction. Often, they claim that the seller failed to make a full and complete disclosure of some historical condition or failed to provide certain historical documents. Sadly, many sellers fail to fully understand the need to provide all disclosures and documentation in their possession to buyers in a timely fashion, thus giving buyers a possible argument to justify their cancellation.
Sellers who review the PRDS or C.A.R. advisory on filling out the disclosure documents and then provide full and complete disclosures coupled with all of their historical documents have the best chance of avoiding this type of claim. Providing a full and complete set of historical documents and disclosures (even when the seller believes that the defect, issue, and/or condition has been addressed and has not recurred) prevents a buyer from claiming that they would have investigated the defect, issue, and/or condition in more detail had they known about its history.
The upshot of these claims is typically a dispute over the deposit, assuming that it has been paid. Unfortunately, many buyers cancel before paying the deposit. That type of cancellation can be deemed to constitute a repudiation of the purchase contract and can relieve the seller of any obligation to deliver, among other documents, a Notice To Perform in order to put the buyer in breach of contract. Both the PRDS and C.A.R. purchase contracts require that the deposit be “actually paid” in order for liquidated damages to apply. This is true even where the liquidated damages clause is initialed. This contract language is consistent with Civil Code § 1675(c).
When liquidated damages does not apply, the measure of damage is governed by Civil Code § 3307, which is the difference between the contract price and the fair market value of the property on the date of the breach plus consequential damages. It has been common for the buyer’s offer to be significantly higher than fair market value, in which case their liability for breach of contract may be greater than the amount of the deposit that they should have paid.
Another issue that arises in deposit disputes is whether the seller reasonably attempted to mitigate their damages. Unless specific performance is an option, most sellers will need to resell the property in order to mitigate the damages they have sustained as a result of a buyer’s breach.
Attorneys for buyers often argue that the seller failed to put the property back on the Multiple Listing Service (MLS) but instead contacted and entered into a contract with a buyer who had previously submitted an offer that was not accepted. Often, these buyers wrote an offer that was lower than the successful buyer’s offer and/or will not pay even the same amount they previously offered because they were rejected initially by the seller. Whether the seller acted reasonably in accepting such an offer may depend on a number of factors, including but not limited to market conditions, what evidence (including any appraisals) exists that might support the resale price as being the fair market value, whether there was a counteroffer by the seller or an inquiry whether the new buyer would pay a higher price, the motivations of the new buyer and seller, whether the first buyer was given the opportunity to complete the purchase based upon further negotiations between that buyer and the seller on price or other terms, etc.
Sellers should be aware of this issue and consider whether putting the property back on the MLS before accepting any new offer is a way to address this type of argument by a buyer. Sellers should also take into consideration the potential impact of a delay in relisting the property if that delay is an attempt to affect the perceived stigma of the number of days the property has been on the market.
Another issue that sellers should consider is the price at which they relist the property. Sellers who relist a property for more or less money than it was originally listed for often face a claim by a buyer that they have not reasonably attempted to mitigate their damages. If the seller’s original marketing strategy is not going to be followed for the resale, the seller may need to provide an explanation for why they changed that strategy.
Another issue that has arisen frequently recently regarding mitigation of damages is the seller rejecting a new offer because they believe they can receive a higher one. When a higher offer does not materialize or another offer comes in that is lower than the first one, the seller will have to explain their rejection of the earlier offer. The relationship of these offers to the deposit may have an impact on whether an arbitrator concludes that the seller acted reasonably.
The month of March has also brought in a number of claims by buyers that they were told by their agent that they needed to write a non-contingent offer and then learned that the level of competition did not require that they do so. Although the primary target of this type of claim is the buyer’s agent, the seller’s agent is also a potential target, depending upon the discussions and/or written communications, if any, that occurred between the agents prior to the offer being made.
Buyers’ agents should focus on what the seller’s agent actually says and need to recognize the distinction between a question about how many offers is the selling agent “expecting” (not a helpful inquiry) and questions asking whether any offers have “actually been physically received”; the questions “have any appointments been set to present any offers?” (assuming that that activity still occurs) and “how many disclosure packets have been viewed by prospective buyers?” are somewhat informative but are not conclusive as to the existence of multiple offers.
Sellers’ agents need to respond to any inquiries truthfully and completely. Under certain circumstances, there may also be an obligation to update any buyer’s agent if a prior statement has been made by the seller’s agent that is no longer accurate. Confirming these discussions in writing is also a good way to avoid any misunderstandings or miscommunications on this subject. Claims by buyers and sellers regarding these issues have involved not only monetary liability but also potential ethics claims.
While the cancellation epidemic persists, buyers and sellers ran into other issues with regard to industry forms. One issue that arose for those using the PRDS Seller’s Supplemental Checklist was a misunderstanding of the phrase “Work Finaled?” (found in Part III, Questions B and D). These words refer to whether any permits for the Work that has been performed by seller have been finaled. These words do not refer to whether the Work itself has been completed or finished.
For those using the C.A.R. purchase agreement, issues have continued to arise because the paragraph references in the ancillary documents used in conjunction with that agreement do not match those in the agreement. The primary example I have been seeing is the Contingency Removal form. Buyers and sellers have been using inconsistencies in forms to dispute the validity of actions taken pursuant to these forms and the impact of those actions on contractual performance – all of which can then impact the potential liability of the agents.
Another ongoing issue with the new C.A.R. purchase agreement is the perception that the grid represents all of the contractual terms rather than the “negotiable” aspects of the contract. Unfortunately, some buyers and sellers are not appreciating the consequences of that mistaken perception and therefore do not have a complete understanding of all of their contractual rights, duties, and obligations. This has led to claims regarding the right to cancel and the right to retain the deposit.
Agents need to be documenting (by sending emails) that they have properly advised their clients to read all documents carefully before signing to help minimize their risks if there is a later claim. The cancellation epidemic continues to cost many brokerages more than just a lost commission.
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