RE: BUYER/SELLER CANCELLATION RIGHTS

RE: Buyer/Seller Cancellation Rights

Buyer and Seller each have a limited right to cancel a pending transaction when the other party fails to perform.

Neither party can cancel until a Notice to Buyer to Perform (“NBP”), Notice to Seller to Perform (“NSP”) or Demand to Close Escrow (“DCE”) has been sent to the other party.

Cancellation rights are controlled by Paragraphs 14A through 14F in the RPA.

Seller’s Right to Cancel

Seller cannot cancel any transaction without first delivering to Buyer a Notice to Buyer to Perform (14B) or a Demand to Close Escrow (14E).

The RPA requires Buyer to make the initial deposit within three (3) days, provide preapproval letter within seven (7) days and provide verification of closing funds within seven (7) days. If Buyer fails to do any of these tasks, then Seller can only cancel after first delivering a NBP to the Buyer.

The RPA also requires Buyer to remove all contingencies within 17 days of the contract date. Contingencies include appraisal, financing, inspection, title report and approval of all disclosures.

If Buyer fails to remove contingencies, then Seller must deliver a NBP to the Buyer. If the Buyer ignores the NBP and fails to remove contingencies within 24 hours, then Seller can: (1) terminate immediately; or (2) proceed in hopes that Buyer will eventually close. If Seller elects to proceed without requiring Buyer to remove contingencies, then be advised that Buyer can cancel up until the closing date and get his deposit back.

Paragraph 14B(4) states:

“Continuation of Contingency. Even after the end of the time specified in 14B(1) and before Seller cancels this Agreement, if at all, pursuant to 14C, Buyer retains the right to either (i) in writing remove remaining contingencies, or (ii) cancel this Agreement based upon a remaining contingency or Seller’s failure to Deliver the specified items. Once Buyer’s written removal of all contingencies is Delivered to Seller, Seller may not cancel this Agreement pursuant to 14C(1).”

Listing agents should obtain an informed written consent from the Seller if the deal proceeds without Buyer removing contingencies. Seller would acknowledge in the informed consent that the agent has advised that Buyer can cancel up to the closing date and get his deposit back, and agree to hold the agent/broker harmless from any loss caused by last minute cancellation.

The burden of demanding that Buyer remove contingencies is on the listing agent and your Seller will blame you if Buyer cancels at the last minute.

Buyer’s Right to Cancel

Buyer cannot cancel any transaction based on Seller’s default without first delivering either a Notice to Seller to Perform (14A) or a Demand to Close Escrow (“DCE”).

The RPA requires Seller to deliver all required disclosures, reports and information within seven (7) days of the contract date (“Required Disclosures”).

Required Disclosures include the Lead Based Paint Disclosure, Transfer Disclosure Statement, Natural Hazard Disclosure Statement and Supplemental Tax (Mello-Roos) Disclosure (6A-C). Required Disclosures also include information required by Paragraph 4, 7(A), 9(A), 11(A)-(B), and 12 such as inspection reports, HOA documents, pest insurance claims, preliminary title report and any disclosure specified by Paragraph 11 of the RPA.

If Seller fails to deliver any of the Required Disclosures, then Buyer should give Seller a Notice to Seller to Perform (“NSP”) prior to cancelling. If Buyer delivers a NSP and Seller still fails to deliver the required disclosures, then Buyer can: (1) terminate; (2) proceed reserving the right to cancel based upon the disclosures at a later time; or (3) sue for specific performance.

I advise that it is in Seller’s best interest to deliver all Required Disclosures as soon as possible. If Seller delays delivery of any Required Disclosure, then Buyer simply gets more time to cancel. Regarding late disclosures, Paragraph 14(B)3 states in part:

“However, if any report, disclosure or information for which Seller is responsible is not Delivered within the time specified in 14A, then Buyer has 5 (___) Days After Delivery of any such items, or the time specified in 14B(1), whichever is later, to Deliver to Seller a removal of the applicable contingencies is Delivered to Seller. Seller may not cancel this Agreement pursuant to 14C(1).’

For example, if Seller delays delivery of the Transfer Disclosure Statement until five (5) days prior to close of escrow, then Buyer can disapprove the late disclosure on the closing date and get his deposit back.

Close of Escrow

If a Buyer or Seller refuses to close on the closing date, the transaction cannot be cancelled until after the performing Buyer or Seller first delivers a Demand to Close Escrow (“DCE”) to the other party.

Paragraph 14E provides:

“Close of Escrow. Before Seller or Buyer may cancel this Agreement for failure of the other party to close escrow pursuant to this Agreement, Seller or Buyer must first Deliver to the other a demand to close escrow (C.A.R. Form DCE).”

California Association of Realtors introduced the DCE form in 2005. Its introduction was necessary because the NBP form when used by a Seller to Demand Close of Escrow inadvertently gave the Buyer the option to cancel at the last minute and get his deposit back even when all contingencies had been removed.

The DCE form requires the performing party to allow three (3) days to expire before cancelling. If the performing party wants to give less time, the DCE form can be modified to provide for less notice (i.e. 24 or 48 hours). There is no reason why the DCE cannot be served three (3) days prior to the closing date to assure timely performance by the Buyer.

It is critical that the listing and selling agents both understand that neither can cancel based upon failure of a Buyer or Seller to close escrow until the DCE form has been sent and the time for response has expired.

Any party that cancels without first delivering a DCE form to the other party is in breach of the Agreement.

Summary

Anytime a Buyer or Seller cancels, your transaction file must contain either a NBP, NSP or DCE.

 

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