If applicable, talk with your Broker about the situation before moving forward. If you are a Broker, and a RealtorÂ®, talk to CAR legal. The truth of the matter is that you may be leaving out specifics that are pertinent to the situation.
Assuming you used the most recent CAR Residential Purchase Agreement (4/10), here are a few points to consider:
1) If the Buyer is in default, then Seller can cancel the contract and claim the Buyerâ€™s deposit per Para 16 -Liquidated Damages; HOWEVER, all buyer contingencies must be removed in order to do so. The contingencies in the CAR RPA are NOT "passive", meaning the Buyer must remove them in writing. Going past the contingency due date does not remove the contingency.
2) Para 14C(1) of the RPA states, "If, within time specified in this Agreement, Buyer does not, in writing, Deliver to Seller a removal of the applicable contingency or cancellation of this Agreement then Seller, after first Delivering to Buyer a Notice to Buyer to Perform (C.A.R. Form NBP) may cancel this Agreement. In such event, Seller shall authorize return of Buyer's deposit."
3) Para 14F of the RPA states, "If Buyer or Seller gives written notice of cancellation â€¦.A Buyer or Seller may be subject to a civil penalty of up to $1,000 for refusal to sign such instructions if no good faith dispute exists as to who is entitled to the deposited funds (Civil Code Â§1057.3)." The Seller must release the deposit within 30 days per Civil Code Â§1057.3 http://law.onecle.com/california/civil/1057.3.html
Only other thing I can think of is to see if what showed up on the PEST Report was somehow not disclosed properly on Sellers disclosures...perhaps you will have a leg to stand on there....
Best of luck to you.