Deposit Disputes Arising out of Requests for Repairs

By David Hamerslough

July 13th, 2016

Last month's article identified some of the factors that buyers and sellers might take into consideration while negotiating and reaching an agreement on a Request For Repairs. This article focuses on some of the legal issues related to a deposit dispute that arises when the agreed-upon repairs have not been completed by the proposed close of escrow or the buyer claims that the repairs are not consistent with the scope and quality agreed upon by the parties.

The starting point for analyzing who is entitled to the deposit is the specific language of the Request For Repairs. A Request for Repairs normally does not include language giving the buyer the right to cancel the contract if the repairs are not timely or satisfactorily completed. In that circumstance, the buyer would first issue a Notice To Perform and then attempt to cancel the contract if the seller failed to complete the repairs within the timeframe specified in the Notice. Whether the buyer would then have the right to cancel the contract would depend on whether the nonperformance of the repairs constituted a material or substantial breach of the contract. This will be determined on a case-by-case basis. If the agreed-upon repairs do not materially impact the condition, use, or utility of the property or otherwise present a material health or safety issue, nonperformance of the repairs may not entitle the buyer to cancel the contract. Another factor may be whether monetary damages are adequate to compensate the buyer for any delay in taking occupancy or any other nonperformance by the seller regarding the quality or scope of the repairs.

This is where a holdback from the seller's proceeds is commonly used to preserve the funds necessary to complete the repairs. On the other hand, if a seller is unwilling to hold funds or does not appear motivated to complete the agreed-upon repairs, a buyer can close escrow under protest, reserving all rights and claims. Another option is for either party to invoke the mediation clause and try to reach a resolution through this process. There are costs and time delays involved in the mediation process, so the parties need to evaluate the impact that mediation will have on a buyer's loan commitment or on a seller's need to use the funds to close their next transaction.

Whatever course of action is selected by the buyer and seller, the statements and conduct of the buyer and seller, as well as their respective agents, can affect their entitlement to the deposit. When the listing and selling agents start talking about how the transaction can be salvaged and begin making proposals with that in mind, their statements, in their capacity as agents, may be binding on their principal (the buyer and/or seller). This may occur even if the principal does not know that these discussions and proposals are taking place. Two legal concepts that may be involved are waiver and estoppel. If what is being proposed by way of resolution is inconsistent with a right that the buyer or seller is asserting, that inconsistency may create a situation where the buyer or seller has waived their right or is estopped to assert it. If, for example, the issue concerns the scope or quality of the repairs, but the parties start discussing ways to remedy either of these issues, that may undercut a buyer's ability to claim that the issue is so material that it cannot be remedied or demonstrate that a seller's position that the scope and quality of the repairs met the necessary standard.

Common-law rescission rights may also impact this type of dispute. A party can rescind a contract based on, among other grounds, fraud or mistake (whether that mistake is mutual or unilateral). If the repairs were not completed because the parties discovered new, different, or unforeseen conditions relating to the areas or conditions that were being repaired, these conditions may provide an independent basis for a buyer to cancel the contract.

I recently handled a transaction on behalf of a buyer that involved all of these issues. Buyer and seller had negotiated a Request For Repairs. Engineers were retained by both parties to provide a scope of repair related to cracks in the foundation. The parties agreed with the scope of repair identified by the seller's engineer. This engineer called for brackets to be affixed to the foundation in certain locations. The proposal was unclear as to all of these locations. A dispute arose when the repairs were not completed on time and in all of the locations understood by the buyer to be necessary. The buyer also discovered additional cracks in the foundation that had not previously been detected by either party's engineer. The Request For Repairs agreed to by the parties included a clause that gave the buyer the right to cancel the transaction and receive a refund of their deposit in the event that the repairs were not completed by the proposed close of escrow. The dispute arose because buyer cancelled and seller responded by claiming that buyer was in breach of contract because the repairs had been completed based upon the agreed-upon scope or, alternatively, buyer had not promptly exercised their right to cancel but had instead engaged in new negotiations for an agreement to remedy all of buyer's concerns.

These new negotiations were started by the two agents, who were simply attempting to salvage the transaction and determine where the parties were in agreement and what it would cost to address those issues that were in dispute. The buyer participated in those discussions for a short time, and an addendum was drafted with proposed solutions involving some additional work by the seller, all of which was to be completed before close of escrow or within a short time thereafter.

The seller argued that these discussions, negotiations, and proposed addendum created a situation where the buyer had waived their right to insist on cancellation or would be estopped to assert it. The buyer asserted that they had promptly exercised their right of cancellation and that they were not aware that their agent had engaged in these discussions/negotiations. The buyer also argued that the existence of new cracks in the foundation, previously undetected by either engineer, gave rise to a common-law right of rescission.

The parties invoked the mediation clause. The dispute was resolved following the mediation, with the buyer receiving 75% of their deposit. The buyer's position would have been significantly weaker had the Request For Repairs not included language providing the buyer with the right to cancel and receive a refund of the deposit in the event the repairs were not completed by the proposed close of escrow. This clause had been added at the buyer's request because the buyer was concerned about whether they would be able to re-qualify for a loan if escrow did not close as originally scheduled. The Request For Repairs did not contain any recital that this was part of the reason for including the cancellation language. While there is certainly no legal obligation to include such language, the absence of it allows a seller to question a buyer's motives and good faith. For this reason, it often makes sense to specify the reason for this right of cancellation if it can be done without undermining the buyer's negotiating position.

The amount involved in most deposit disputes makes it hard to justify litigating them, because the attorneys' fees and costs quickly become disproportionate to the amount in dispute. An added factor is the buyers' and sellers' emotions, which tend to run high. While recovery of attorneys' fees and costs is provided for under the purchase contract, one does not always receive full reimbursement. The worst thing that can happen is for the attorneys' fees and costs to outstrip the amount in dispute and the case is forced into arbitration or litigation. The key is to retain a qualified real estate attorney who can quickly analyze the facts and applicable law and provide advice accordingly.

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