Buyer‘s ’Legal Leverage‘ to Avoid Seller’s Attempt to Cancel Escrow

About the Author: Pete Wittlin is a 30+ year practicing real estate law attorney in Irvine, California, who assists sellers and buyers of real estate in resolving their purchase contract rights, i.e., to cancel or enforce.  Pete is the 30-year Editor of the O.C. Bar Ass’n’s Real Estate Law Section’s “Real Estate Law Update” which monthly summarizes important new appellate decisions and annually legislative developments affecting real estate law practice in California, for which he has thrice received the Section’s “Most Outstanding Achievement” “Award.

Seller’s Remorse.  The standard residential real purchase contract (“Contract”) is designed to work against it, but doesn’t always do so.  You as a Realtor can use the help of a skilled, experienced attorney to (a) enforce Buyer’s rights, and (b) thereby protect the Realtor’s right to a commission.

Standard Contract Language.  As you know, the modern Contract allows Seller to cancel the deal only if Buyer waives contingencies, e.g., appraisal or loan approval, or others conditions, and only after Seller gives Buyer a Notice to Buyer to Perform (“NBP”) them within, e.g., 48 hours, and within such notice period Buyer in writing “waives” the contingencies or Buyer himself/herself elects to cancel escrow. Once contingencies are waived by Buyer, Buyer must close escrow as scheduled or lose its deposit, i.e., generally up to 3% of the purchase price as “liquidated damages” to Seller for Buyer’s breach of contract.

Seller’s Failure to Give Buyer an NBP Form.  In a deal with no existing or prospective back-up offers, Seller may be reluctant early to force Buyer’s hand by demanding Buyer waive contingencies or cancel, and so may elect not to give a NBP notice soon after the initial 17-day look-and-see period, or ever.  Seller may trust Buyer to obtain loan approval right up to the scheduled close of escrow.  This would allow Buyer, if acting in good faith, to cancel escrow just before it is scheduled to close and obtain back from escrow Buyer’s deposit. This would be disasterous to Realtor, thereby being deprived of a commission.

If the parties allow the scheduled date of escrow to pass without Buyer’s funding the purchase, Buyer is treading on being in breach of contract and forfeiting the deposit: the Contract, however, has a safety clause, i.e., the time to close of escrow is extended up to 5 days if beforehand Buyer gives Seller written notice of extension.  If escrow doesn’t close within the additional 5 days, Buyer will indeed be in breach and likely forfeit the deposit.

Seller’s Remorse.  What if Seller has since received a full-cash offer, or one with more favorable terms, and is looking a way to cancel the deal, but Buyer really wants to consummate purchase?  Seller knows that Buyer is having difficulty obtaining loan approval, and gives Buyer a 48-hour NBP.  Inherent in the “Contract” is an “implied covenant of good faith” that neither side will do anything to interfere with the rights of the other.  For example, if Buyer does really try to obtain loan approval after being initially rejected for it, Buyer may not maintain failure of the contingency as a reason to cancel the deal.  If loan approval is market available, Buyer must exercise its best efforts to obtain it or forfeit the deposit.

Seller’s “Fraud.”  Legal Leverage for Buyer.  What if Buyer in the face of an NBP asks for additional time beyond the 48-hour notice period to obtain funding, and hence does not timely waive contingencies or cancel, and as a result Seller insists on canceling escrow?  To forestall cancellation of escrow, Buyer’s attorney may threaten Seller with suit for “fraud” for Seller’s alleged failure to have disclosed to Buyer defective elements of the home, i.e., defective plumbing or water heater, mold, etc., demanding the escrow now close or to refund back Buyer’s deposit. A sale “as is” is not immune to “fraud” allegations. This “legal leverage” may make Seller think twice about wanting to cancel escrow, and to adjust the deal so it may soon close, and Realtor’s commission be paid.

Summary.  So if Seller is “squeezing” Buyer to cancel, and Buyer really wants to close the deal, it may behoove Realtor to recommend to Buyer to retain legal counsel to exercise “legal leverage” to push the deal through.

Note: Attorney Wittlin also represents Sellers and Buyers in resolving disputes through mediation and arbitration.

If you would like to contact Peter Wittlin or are in need of legal representation, please fill out the form below to request more information.

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