WRITTEN BY BOB HUNT
Breaking up is hard to do. So is cancelling a California real estate purchase contract. Especially if you are the seller. That is why, a little over a year ago, the legal department of the California Association of Realtors (CAR) produced a memorandum titled, “How a Seller May Cancel a Purchase Agreement: Checklist and Q&A”.
The need for such an advisory arises out of the fact that a non-performing buyer may still want to buy. Sometimes buyers miss performance deadlines due to nothing more than sheer inefficiency. Sometimes it is because things have not gone as planned (e.g. they don’t yet have the money for the increased deposit that is due). And, sometimes, they stall the closing in an attempt to squeeze the seller for a further concession. In each case, they still want to buy — just not on exactly the terms that had been agreed to.
The CAR memo notes: “Many sellers and agents are impatient. They want the contract canceled yesterday. But rushing the process of cancellation will often lead to a defective or questionable cancellation. What good does it do to cancel a contract if the buyer can come back and possibly claim a right to buy?”
For what reasons may a seller cancel? In a typical situation, the standard purchase contract (RPA) provides exactly ten reasons. The CAR memo provides the following list: (1) buyer failure to remove an applicable contingency; (2) buyer failure to deposit the earnest money, or an increased deposit; (3) funds for money deposited are not good; (4) buyer fails to deliver prequalification letter; (5) buyer fails to deliver verification of down payment and closing costs; (6) seller has reasonably disapproved of the verification of funds; (7) buyer fails to return the Transfer Disclosure Statement, Natural Hazard Disclosure, lead disclosures or other disclosures (if required); (8) buyer fails to sign a separate liquidated damages form for an increased deposit; (9) buyer fails to deliver notice of FHA or VA costs or terms (if applicable); and, finally, (10) buyer does not close escrow on time.
The ten reasons listed are in a standard transaction. Other possibilities could be added, such as a contingency for short sale approval, or the purchase of another property. Also, there are common law legal reasons such as fraud or duress.
When a buyer has failed to comply with one of the conditions in 1 — 9 above, the seller must, before canceling, first give the buyer a Notice to Buyer to Perform (NBP). In such an instance, it is important that the seller and his agent are careful to calculate correctly what is the buyer’s deadline date for compliance. The NBP can be delivered no earlier than two days before that date.
If the buyer has failed to close escrow on time (condition #10), then the seller should use the Demand to Close Escrow (DCE), not a notice to perform.
It is also important that the seller has fulfilled all of his obligations with respect to the buyer’s contingencies. “The [Purchase Contract] specifies that where the seller has sent out disclosures, reports or other information late, then the buyer will have an additional 5 days after receipt to remove contingencies if those 5 days go beyond the [contractual] contingency period.”
Sellers will often want to retain some or all of a buyer’s earnest money deposit. In cases where an NBP has been used, this is not possible. The purchase contract gives the seller the right to cancel if the buyer has not performed after receiving an NBP, but it also provides that the seller will release the deposit money, less costs incurred. This is not the case, however, when the seller has given the buyer a Demand to Close Escrow (DCE).
If the buyer has not conformed with a Notice to Perform, or has not closed after receiving a Demand to Close Escrow, the seller may then deliver a Cancellation of Contract (CC) to the buyer. This form comes in two parts: one cancels the contract, the other cancels escrow and provides for disposition of the deposit money. It is important to note that the first part, unlike the second, does not require the signatures of both parties. It is relevant again to quote from the CAR memorandum:
“Cancellation is a unilateral act regardless of whether there is an open escrow. The ten reasons for cancellation as outlined confer upon the seller a right to cancel unilaterally. It is irrelevant whether the buyer ‘agrees’ to the cancellation. As long as the seller has properly followed the correct procedure, the seller’s cancellation will be effective.”
It goes on to say, “Escrow may require signatures from both parties to cancel the escrow, but the fact of an escrow being open does not affect the validity of the seller’s cancellation.” And further, “The fact that there is an open escrow does not by itself mean that the initial buyer retains a right to buy. If the contract was properly cancelled, then a seller may sell the property to a subsequent buyer.”
Of course, there are still issues to be discussed. What happens to deposit money if the buyer balks? Can the property be put on the market if escrow isn’t cancelled? What is the prudent thing to do? & etc. But those are all for discussion some other day.