When Things Go Wrong

Is there a more dreaded phone call than having the selling agent call and say, “the buyers are really sorry, but they have to cancel the contract because ... blah, blah, blah ...” We stop listening after the word “cancel” as we rapidly think of possible back up offers or any other interested prospects.

Not so fast. The process of canceling an offer has a lot of twists and turns and the road back on the market may not be as smooth as you would like. Of course, a lot turns on the timing of the cancellation. While a call in the first few days before contingencies have been removed is likely to be relatively simple, a cancellation deeper into the contract especially after contingencies have been removed may become more problematic.

First and foremost, we are dealing with contracts. Second, we are not attorneys. We are REALTORS® and are not equipped to advise our clients with certainty what the outcome will be. Oh, but you have the “liquidated damage clause” initialed. Doesn’t that make it cut and dry? Not according to the many deposit disputes that have been heard in mediations over the years.

You can never go wrong by recommending legal advice for your client in this circumstance (seller or buyer) especially if it appears that the other party is not going to sign the release paperwork promptly. You should be talking to your broker. Oh, you are the broker? Then, you or the other REALTOR®, could also contact the C.A.R. Legal Hotline at (213) 739-8282 or legal_hotline@car.org for some legal advice.

In a perfect world when contingencies have not been removed, the parties may just agree to mutually cancel the contract and release the buyers‘ deposit from escrow minus any outstanding costs for inspections or reports. You can use the zipForm® “Cancellation of Contract, Release of Deposit and Joint Escrow Instructions”. You will also need to check with your escrow company to see if they have another form to be signed to release liability for the return of the deposit.

Unfortunately, we don’t all live in a perfect world and that’s where things get stickier. If the buyer cancels the contract with the “liquidated damage clause” initialed and wants their deposit back after they have released their contingencies, there is a good chance the seller will resist that request.

What to do? Besides recommending legal advice (you can never go wrong by this recommendation) you can also recommend mediation. As a Bay East member, you can suggest mediation to your clients at a low rate through the Association - it’s a member benefit. During mediation, the parties will have an opportunity to discuss why they believe they are entitled to the deposit and get a better understanding of the issues from the other party’s perspective. The experienced mediators will do their best to assist the parties to come to an amicable resolution of the dispute.

What NOT to do? Since we are not attorneys, we should never tell our client what the outcome of the dispute will be. We can offer our experience in similar situations, but it is not always cut and dry that the seller retains the deposit after the contingencies have been removed.

We have seen in many mediations the variables that can effect the outcome, including whether the seller sold the property at a lesser or greater amount than in the original contract. Or, the amount of the deposit subject to the clause may be the issue; failure to have the parties sign the “Receipt for Increased Deposit/Liquidated Damages” has made more than several appearances in mediation. That’s why legal advice is very important, because it’s not always as clear who is entitled to the deposit.

Ultimately, the contract and the cancellation form states “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.” If you still haven’t recommended legal advice and your client is refusing to sign the release, this would be a good thing to point out in the contact and then INSIST that they see an attorney for advice before it costs them an extra $1,000.