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Claims Update

By David Hamerslough and Victoria B. Naidorf

This month’s article identifies some of the claims that we and several of our colleagues have been handling, as well as some of those identified at one of the forums we attended during the recent C.A.R. meetings in Sacramento. 

Cancellations By Buyers

The cancellation epidemic continues. Here are some of the latest fact patterns that are resulting in cancellations by buyers. 

Cancellations By Buyers Who Changed Their Minds

For whatever reasons (e.g., remorse over the purchase price and/or the property itself, employment concerns, visa concerns, etc.), buyers still believe they can cancel without contractual or legal justification for doing so and avoid damage claims by sellers. This mistaken belief especially exists when the cancellation comes within a day or two of contract ratification. Too many buyers continue to mistakenly assume that a quick cancellation does not result in any damages to the seller because the seller has the ability to remarket the property quickly.  What these buyers continue to overlook is that an unjustified cancellation at any time results in potential damages to the seller based upon liquidated damages or a loss of the benefit of the contractual bargain. 

Condominium Buyers Cancelling Because Their Lender Pulls Funding

We have had several claims involving lenders scrutinizing homeowners’ association minutes, reserve studies, and/or reports generated as a result of past litigation between the HOA and the developer/builder and then pulling funding as a result of issues, conditions, and/or defects identified in these documents. 

We have had other claims where the lender has pulled funding because of incomplete HOA disclosure packages (examples include a lack of all required board minutes, incomplete information regarding special assessments, and documents that are not current based on the length of time between the original package being compiled and a contract being ratified with a buyer). 

Cancellations By Wholesaler/Investor Buyers

The two fact patterns that have arisen are (1) these buyers get into contract and then investigate/inspect the property and then use the results to cancel unless the seller renegotiates the purchase price and (2) these buyers submit contracts with assignment provisions and then cancel because they are unable to find a buyer to flip the property to. 

Please note that many wholesaler/investor buyers are utilizing their own contract forms rather than PRDS and/or C.A.R. forms. These contract forms need to be reviewed so that the seller understands the terms and conditions of the purchase, which may provide for cancellation and/or assignment rights other than as typically provided for in industry forms. 

Another issue we have encountered with these non-standard contract forms is that they do not include all of the statutorily required disclosures. Many of these buyers claim that they will waive their right to such disclosures, but doing so is generally against public policy. In this circumstance, the seller is going to affirmatively have to provide all of these disclosures, including the new disclosures that went into effect January 1 of this year (Preliminary Observations On Four New Disclosure Laws). 

Buyers Cancelling Because Sellers Failed To Provide Historical Documents 

Question 5 of the C.A.R. SPQ continues to be a source of claims. While C.A.R. recently revised this question to now contain a reference to a revised Receipt For Reports (RFR), this addition appears to be directed to practitioners in Southern California who may not be used to the practice in this geographic area of providing up-front online disclosure packets that hopefully include all historical documents in the seller’s and broker’s possession. The scope/breadth of Question 5 in the SPQ continues to be a challenge for sellers, as well as the requirement that any historical documents in their possession are to be attached to the SPQ. Buyers continue to utilize a failure on the part of the seller to properly respond to Question 5 as a basis to demand an amended/supplemental disclosure under Paragraph 11(A)(4) of the C.A.R. RPA and then terminate upon receipt of those amended/supplemental disclosures. 

Please note that the failure to provide historical documents also results in post-close-of-escrow claims when the buyer discovers some issue, condition, and/or defect with the property – the historical documents are requested and then used to establish prior knowledge on the part of the seller. 

Here are some observations we have to try and address these fact patterns:

  • Try and make sure that the buyer has reviewed and evaluated the property based upon their needs and wants before making their offer. 
  • Many of the buyers involved in these claims have written non-contingent offers when market conditions and competition did not warrant doing so. We continue to hear buyers contend that they wrote a non-contingent offer because they were told that was the only way they were going to be competitive. However, when asked whether they were aware of any competition, or how long the property had been on the market, many times, there was no other competition, and the property had been on the market for several weeks or more.
  • Unless there is a solid contractual and/or legal basis to cancel, the buyer and the buyer’s agent should not be communicating any desire on the part of the buyer to cancel before the buyer has consulted a qualified California real estate attorney. Buyers need to understand that there may be grounds to cancel the contract that they are unaware of but that a qualified California real estate attorney may be able to raise on their behalf. 
  • Some of the indications that the seller may not have understood the scope of Question 5 are (1) when it is answered in the negative; given the scope/breadth of this question, a negative response by most sellers is likely to be an indication that they did not understand the scope/breadth of the question; (2) Question 5 has been answered in the affirmative, but the only documents identified are current inspection reports; (3) seller’s disclosures and/or the marketing material identify improvements and/or repairs to the property but no documents regarding this work are provided by the seller. 
  • One way for a seller to appreciate the scope/breadth of Question 5 is to have them organize their documents (if they exist) into three categories: (1) documents from their acquisition of the property, (2) documents regarding improvements and/or repairs during their ownership, and (3) documents relating to the preparation of the property for sale and its listing. 
  • Condominium buyers with a loan contingency should review the HOA disclosure packet to make sure it is complete and make sure their lender has had a chance to review it before removing their loan contingency. If possible, obtain an extension of any loan contingency to give the lender additional time to evaluate the loan. 
  • Sellers who are considering contracting with wholesale/investor buyers should have the contract reviewed by a qualified California real estate attorney before signing it. 

We wrote about cancellation issues earlier this year (Beware The Ides Of March). We have also previously written about the disclosure issues that are discussed in this article. Those articles may be found on the Rossi, Hamerslough, Reischl & Chuck website. These other articles contain additional observations and recommendations relating to disclosures, including those involving historical documents.