In my last article, we discussed liquidated damages in the context of a residential real estate purchase contract. This article will examine whether a buyer may have a right to back out of a contract and receive their full deposit back, after contingencies are released.
In our thriving real estate market, non-contingent offers are increasingly common. Sellers make all disclosures available to buyers before offers are made, and buyers are willing to present offers without contingencies in hopes of having their offer be more appealing and accepted (note, the potential dangers and issues involved for both buyers and sellers is a topic for another day). However, as the buyers are oftentimes making a quick decision, there are many situations where the buyer may seek to get out of the contract, alleging some material issue with the property was not known to them until after they entered into the contract. This article discusses how those situations often play out.
An illustration of what usually happens in these scenarios is the buyer claims that they discovered something after releasing contingencies that they were not informed of prior to entering into the contract/releasing contingencies. This could be based on further investigations the buyer does, the buyer’s own observation, something the buyer hears from a neighbor or agent, etc. The question thus becomes, can the buyer back out?
As is often the case in the law, it depends.
One scenario is that the buyer raises the newly discovered issue, and the seller then realizes, “oh yeah, I forgot to mention the roof leak,” and then issues a supplemental written disclosure. Per the terms of the CAR contract (as well as some other form contracts), the new written disclosure automatically re-opens the buyer’s property condition contingency for “x” days (the standard included in the form is 5 days, however that number can be changed – see CAR Residential Purchase Agreement, Paragraph 14(b)(3)). Thus, the buyer can then cancel the contract based on this new disclosure within said timeframe, or accept the property as-is or try and negotiate a price reduction or repair.
Another common scenario is when the buyer raises the newly discovered issue, and the seller then claims or genuinely does not know of the claimed issue. In this scenario, you oftentimes have somewhat of a standoff. The buyer is going to want to try and prove that the seller really did know and is refusing to acknowledge the same in an attempt to force the buyer to close escrow. The seller is going to maintain their innocence and claim they did not know, thus there is nothing to disclose and the buyer must close escrow. This is the scenario where we most often see dispute. A common resolution is for the buyer and seller to agree to cancel the contract, with the funds being held in escrow for a later determination (either by mutual agreement or by an arbitrator or judge) as to who will get which portion, if any, of the deposit. Of course, either side may refuse to cancel or maintain that they are in the right, and this is where it is critical to involve legal counsel to assess the options and try and resolve the matter.
A similar scenario is where the sellers presume that the buyer is simply raising the alleged newly discovered issue because they simply had a change of heart and want to find a way to back out. Obviously, proving this is a battle, and these are oftentimes another situation in which a dispute may arise as to whether there is a right to back out, and if the buyer ultimately does back out, who gets the deposit.
The final common scenario is where the buyer raises the newly discovered issue, and the parties are able to amicably resolve the dispute. This can be by either agreeing to further inspections for the issue (with a decision thereafter on how to proceed), a negotiation for some sort of price adjustment or repair, or each side simply agreeing to cancel and mutual agreement on how the deposit will be distributed. This is the resolution we all hope for, but unfortunately it is not the scenario we see most often.
This issue is one that we see on a near weekly basis. The analysis and options are very fact specific, so if you are in this situation, we strongly recommend you seek counsel to learn of your rights and best strategies.