Out of Contract? Not So Fast…

Real Estate Contracts & Transactions by Adam Pedersen, Esq.

It’s been about three weeks since Steve and Sally Seller signed the contract with with Billy
Buyer on their two-bedroom one-bath condo in Mountain View. It their first home and had made
for a great rental over the years, but with an offer for nearly two million dollars for a 20 year old
condo, Steve and Sally were ready to say goodbye. Everything had gone relatively smoothly,
but with the close of escrow a week away and little progress being made on Billy’s loan, Steve
and Sally were getting nervous.

Steve and Sally called their listing agent Sam Sells. What’s going on, they plied. “Should we be
nervous?” Sells assured them everything was fine and, not to worry, the buyer only had a few
more days to get his loan together before the financing contingency in the contract “expired”. If
he did not have a loan in place at that time he would be “out of contract” Sells assured them,
and they could move on to the next highest bidder. Given the market had gone up even more
during the escrow period, the Sellers felt much better.

Several days passed and still nothing. Sam then calls Sellers to inform them that Billy Buyer
apparently is having trouble getting financing for the purchase. Sellers are concerned, they
have been off the market for weeks. Not to worry, says Sam. The Buyer’s loan contingency
expired early this week and Billy is now “out of contract”. In fact, Sam says he can get Sellers
back “into contract” with Bigger Buyer at a higher price. Sam sends a cancellation to the Sellers
which they dutifully sign and return. Sam sends the cancellation to Billy’s agent and Sellers
move on to buyer number two. All’s well that ends well, right? Not quite…

Based on the above fact pattern, one that I have personally observed numerous times in
practice, the Sellers have unknowingly set themselves up for a potential lawsuit by Billy Buyer
and possibly Bigger Buyer number two. But Billy was “out of contact”, right? The terms “in
contract” and “out of contract” are bandied about by those in the real estate profession often to
the dismay of attorneys like myself. Legally speaking, the terms are without meaning. A valid
enforceable contract either exists or it does not. The problem with the language “out of
contract” is that it seems to imply no enforceable agreement exists and a lay-person would be
excused for thinking the same. However, as we will see, being “out of contract” does not always
mean the parties’ agreement has been dissolved.

The issue presented in our story highlights a let feature of the most commonly used purchase
agreement in the state, the C.A.R. purchase contract: it is, generally speaking, NOT a
self-executing document. Taking the example above, just because a party has not met a
contingency deadline – and is, in the words Sam Sells,“out of contract” – does not mean there is
no longer a valid enforceable agreement.

The C.A.R. purchase agreement requires that a party take affirmative action to enforce
contractual deadlines. It also provides for a “last chance” for a party to meet the relevant
deadline; a fish or cut bait period to cure the allegedly dilatory condition. What should have
occured in our story was that Sam should have advised the Sellers to first deliver to Billy a
Notice to Perform. That form, per the terms of the C.A.R. Agreement, puts the buyer on notice
of the missed contingency deadline and, by default, provides the buyer with two days to either
exercise the contingency and cancel the agreement or waive the contingency and proceed to
close; in other words the buyer must fish or cut bait If the buyer fails to act, then and only then
may the Seller cancel the agreement.

The takeaway here is that affirmative action is required prior to cancellation, being out of
contract does not mean no contract. The wise agent should be wary of using this unfortunately
very common language, as it is likely to confuse if not mislead buyers and sellers. At the same
time, buyers and sellers should be aware that being “out of contract” is not necessarily a license
to ditch the current deal for a more attractive suitor. In this competitive market, buyers and
sellers are more vehemently enforcing the terms of the contract. The best practice for both
consumers and agents is to seek competent legal advice before taking the drastic step of
cancelling a pending transaction. As the story of Sellers’ illustrates, simple inexpensive steps
can save thousands of dollars and massive headaches do the road.

Latest Posts

Landlord & Tenant Law

What a Three-Day Notice to Pay Rent or Quit Really Means

by Lorena Roel, Esq. on September 20, 2018

It is after Labor Day weekend and that means school supplies, summer vacation credit card bills, and preparing for the holidays. With all these added costs, the tenant may not have enough money to pay rent and the landlord serves [Read More]

Real Estate Contracts & Transactions

Can A Buyer Back Out of a Non-Contingent Offer?

by Simon Offord, Esq. on October 2, 2018

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 [Read More]

Real Estate Law Litigation

New California Law Affecting Real Estate Mediation

by Ashlee D. Gonzales, Esq. on October 22, 2018

Approximately 95% of pending lawsuits end in a pre-trial settlement, with a majority of those settlements occurring at mediation. Mediation has been extremely successful for our clients, and it is typically more economical and efficient than going through the court [Read More]