Home Selling in 94501>Question Details

Matt, Home Seller in California

If a buyer's offer includes a contingency, now no longer valid but doesn't remove it, and then decides to cancel, do they forfeit their deposit?

Asked by Matt, California Sat Sep 7, 2013

A buyer made an offer on my home with a pest inspection contingency. If a pest inspection revealed no current infestations, but the buyer decided to cancel anyway for unrelated reaons, would the seller be permitted to keep the good faith deposit? Note: the buyer did not lift the contingency in writing.
0 votes • Share • Unfollow Question • Flag • Delete this question • Home Selling in Torrance

Help the community by answering this question:

Answers

14
As long as the buyer still has an investigation contingency he can cancel for any or no reason.

Mark Wyman,
Broker
Bayside Real Estate
Lic.# 01018021
0 votes Thank Flag Link Wed Oct 30, 2013
As I said, I think there are misconceptions in the field about what the contingencies mean and what constitutes good or bad faith. I'm not an attorney, but this is what I have always been taught and this is my understanding...

There is an implied promise in every contract that the parties must act in good faith to complete the contract and not do anything that would keep the other party from completing the contract.

An investigation contingency allows the buyer to investigate any condition affecting the property. The buyer finding a different property they like better is not a matter affecting the property. It is not acting in good faith to cancel a purchase agreement for this reason.

If a buyer offers to purchase a property with a 50% down payment, then cancels the contact because they didn't qualify for an 80% loan, I believe that is also acting in bad faith. The buyer is not fulfilling the promises they made in the contract they signed.

Both of these examples, I believe, constitute a breach of the contract and put the buyer's good faith deposit at risk.

There are many ways for a buyer to cancel a contract in good faith and the contract clearly favors the buyer's right to cancel. But the buyer has an obligation to the seller to honor the agreement in the contract.
0 votes Thank Flag Link Tue Sep 10, 2013
As I said, I think there are misconceptions in the field about what the contingencies mean and what constitutes good or bad faith. I'm not an attorney, but this is what I have always been taught and this is my understanding...

There is an implied promise in every contract that the parties must act in good faith to complete the contract and not do anything that would keep the other party from completing the contract.

An investigation contingency allows the buyer to investigate any condition affecting the property. The buyer finding a different property they like better is not a matter affecting the property. It is not acting in good faith to cancel a purchase agreement for this reason.

If a buyer offers to purchase a property with a 50% down payment, then cancels the contact because they didn't qualify for an 80% loan, I believe that is also acting in bad faith. The buyer is not fulfilling the promises they made in the contract they signed.

Both of these examples, I believe, constitute a breach of the contract and put the buyer's good faith deposit at risk.

There are many ways for a buyer to cancel a contract in good faith and the contract clearly favors the buyer's right to cancel. But the buyer has an obligation to the seller to honor the agreement in the contract.
0 votes Thank Flag Link Tue Sep 10, 2013
The buyer can cancel for any reason at any time they want as long as they have not removed all contingencies in writing.

J.R. Thrasher
http://www.SanDiegoRealEstateVeterans.com
619-929-0105
0 votes Thank Flag Link Mon Sep 9, 2013
I believe there is a misconception about buyers canceling contracts. The investigation contingency gives buyers a wide range of reasons for canceling. As stated in paragraph 10A, it could be property condition, which is pretty straight forward. It also includes "any other matter affecting the property," such as a troublesome neighbor, a proposed zoning change in the neighborhood, or inadequate student capacity at the local elementary school. However, it does not include the buyer finding a different house they like better, or the buyer deciding they prefer a different town to the one the house is in.

Indeed there is no specific requirement in the contract to state a reason for canceling. But the cancellation instructions allow the seller to refrain from releasing the deposit if there is a good faith dispute. How is the seller to know if there is a good faith dispute, if they don't know the reason the buyer is canceling? Cancelling for "no reason" is acting in bad faith. The seller could retain the buyer's deposit. When representing a buyer who is acting in good faith, it is in their best interest to provide a reason for the cancellation. This proves their right to the return of their deposit.
0 votes Thank Flag Link Sun Sep 8, 2013
I agree with John Juarez. Buyers can opt out because they sky is blue if they do it before expiration of contingencies. That's why contingencies should always be tied to a time period, not to signing an inspection report, etc.
HOWEVER - when we represent sellers we always submit a counter-offer that removes just about every advantage the standard REALTOR contract gives the buyer. If the buyer doesn't accept those terms, buh-bye.
0 votes Thank Flag Link Sat Sep 7, 2013
Iankeye,

I think you need to review paragraph 14. F. EFFECT OF CANCELLATION ON DEPOSTITS

The last sentence “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” should be evaluated before you set your feet in concrete on this matter. I think your Realtor’s advice is sound.

I challenge those Realtors who insist that the buyer must cite a “reason” to cancel to point to language in the contract that specifies that need.

Yes, iankeye, the contact is written to favor the buyer.
0 votes Thank Flag Link Sat Sep 7, 2013
The potential "reasons" for cancellation are the contingencies.
Flag Thu Sep 19, 2013
I believe the buyer needs a valid reason for canceling the contract, or they are in default. I also believe they need to give you a reason for canceling. The buyer is indeed required to act in good faith. If the buyers cancels for a reason that is not spelled out in the contract, then the buyer is in breach and their deposit is at risk. The buyer should provide you with a reason, in writing, for canceling the contract. From there, you (with the help of an attorney) can determine if the buyer is in breach.
0 votes Thank Flag Link Sat Sep 7, 2013
Actually option 2C. authorizes the escrow holder to hold the deposit "until receiving subsequent mutual instructions, judicial decision or arbitration award." So, maybe, I'm not waiving anything by signing and getting my house back on the market, which is of course what I want to do.
Flag Sat Sep 7, 2013
Thank you, Ms. Manuel. That would seem to make sense to me, even as a first-time seller. What I received from the buyer is a cancellation, which I am supposed to sign, indicating that the deposit is to be held in escrow pending further mutual instructions (option 2C on form CAR CC). I'm hesitant to sign it because of the word "mutual."
Flag Sat Sep 7, 2013
It really comes down to bow the contract ws written and whether the contingency window has passed. Do you have an agen?
0 votes Thank Flag Link Sat Sep 7, 2013
I do have a realtor, who also indicated that the deposit would be returned to the buyer. I'm a little unclear about the contingency window, however, since it has already passed and the contingency was never lifted. How does that play into this?
Flag Sat Sep 7, 2013
I have been a Director for the California Association of Realtors since 1992 and sit on the Standard Forms Committee. If Buyer has written their offer on the California Association of Realtor's contract, and contingencies have NOT been removed, the buyer IS NOT in breach and can cancel without giving a reason. As I said, paragraph 14 explains it all. If you still have concerns contact a Real Estate Attorney. Good luck with our transaction.
0 votes Thank Flag Link Sat Sep 7, 2013
Thanks to all for your prompt responses to my inquiry. The standard CAR forms were used. Since the buyer didn't remove the contingency in writing, it appears that they are not in breach and they will receive a refund of their deposit, nothwithstanding the fact that it appears that the buyer simply changed her mind.

If a potential buyer can use the contingency process as a means of getting out of a valid contract, it seems to me that the process is quite flawed and biased against sellers. I assumed, apparently incorrectly, that sellers and buyers of real estate are required to act in good faith. I stand corrected and obviously disappointed.
Flag Sat Sep 7, 2013
Hi
If Buyer used the CAR Purchase Agreement read paragraph 14. Buyer does not have to give a reason to cancel. If Buyer cancels and has not removed his/her contingencies then the deposit needs to be returned or seller could be liable for penalties. If Buyer has removed the investigation of property (inspection) contingency and cancels under that contingency then seller might be able to go after the deposit. If the Buyer goes over the timeline to remove a contingency then the listing agent should advise the seller to give the Buyer a notice to perform. The Buyer can then cancel or remove contingency and proceed with the sale. I always tell my Buyers and Sellers that if a Buyer removes all contingencies and decides to cancel the contract the Buyers deposit could be in jeopardy. The seller does not automatically receive the deposit. The seller would have to go to Small Claims Court or proceed with an Arbitration. If you have concerns about your transaction then you need to consult an attorney.
0 votes Thank Flag Link Sat Sep 7, 2013
Seller,

According the the National Real Estate Practice, the buyer has breached the contract. The pest inspection came back negative. The buyer cannot just cancel the contract. If the buyer defaults, the seller can sue for damages or sue for the purchase price. Hopefully the escrow account holder will make the call to distribute the money to you.

I hope this has answered your question.
0 votes Thank Flag Link Sat Sep 7, 2013
Seller,
I agree with John Juarez. Lisa's advice may be correct in the state in which she works, but in CA, if the buyer has not actively removed their inspection contingency, they can cancel and get their deposit back, period.
Flag Sat Sep 7, 2013
Lisa,

You should not provide a generalized answer that is not appropriate for the state in which the transaction is being negotiated. Your answer is factually not correct. You are not knowledgeable in regard to California real estate contracts.
Flag Sat Sep 7, 2013
If the offer included buyer inspection contingency -- that isn't just for pest inspection only. It could be for other forms of discovery not only about the property, but the environment where the property is located. Just because there were no current infestations, the buyer may have discovered other things that made him pause and decide to cancel.

If he also has a loan appraisal and loan approval contingency, and if he did not release any of those contingencies, then he still has the right to cancel and get his deposit back.

Do you have an agent representing you? Your agent should be able to explain this better than anyone on this forum especially not knowing the buyer's reasons for cancellation.

If you're using the CAR purchase agreement, take a look at paragraph 14-B-4. "Continuation of Contingency: Even after the end of the time specified in 14B(1) and before Seller cancels, if at all, pursuant to 14C, Buyer retains the right to either (1) in writing remove remaining contingencies, or (ii) cancel this Agreement based on a remaining contingency...."

Then look at paragraph 25 regarding Liquidated Damages. "If Buyer fails to complete this purchase of Buyer's default, Seller shall retain, as liquidated damages, the deposit actually paid...."

But it doesn't sound like the Buyer has defaulted since he hasn't released his contingency(ies)
0 votes Thank Flag Link Sat Sep 7, 2013
It really depends upon your contract with the buyer. Usually a pest inspection is part of an investigation contingency which provides the buyer a wide range of reasons to cancel the contingency. If it indeed is only a pest inspection contingency and the buyer cancels for an unrelated reason, then the seller may be able to keep the monies deposited in escrow. Keeping a deposit is also dependent upon both the buyers and sellers initialing the liquidated damages paragraph in the California Association of Realtor's (CAR) Residential Purchase Agreement . If all parties have initialed that paragraph then the seller may keep whatever amount is on deposit, up to 3% of the purchase price. If this paragraph is not initialed by all parties, then the seller would likely need to prove damages to keep any of the deposit money. Lastly, in the CAR purchase agreement, contingencies remain in effect until removed in writing. So even if the contingency period passes, if the party does not remove it in writing they can still use the contingency to cancel the contract. I'd recommend you have a real estate attorney review your contract and advise you of your rights under your specific contract. Good luck!
0 votes Thank Flag Link Sat Sep 7, 2013
Search Advice
Ask our community a question
Email me when…

Learn more

Copyright © 2016 Trulia, Inc. All rights reserved.   |  
Have a question? Visit our Help Center to find the answer