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Deposit Disputes

Ask five real estate licensees this question, and you’re likely to get five different answers. The response may be that it has “flattened,” “transitioned,” “shifted,” “softened,” or “hasn’t changed at all and is still strong.”

Most of these answers are qualified by factors such as the condition of the property, its location and neighborhood, price point, the upcoming election, interest rates, the economy, etc. Opinions also differ regarding how long this “cycle” has been in effect and when it might end.

Whatever your opinion may be on these subjects, here are the types of claims that I have seen related to these issues: (1) deposit disputes; (2) claims by buyers that they have overpaid; (3) claims by sellers that they lost the benefit of their bargain with the buyer due to the buyer cancelling the contract; and (4) claims by sellers to cancel listing agreements because the property has not sold. This article and next month’s article will provide some observations on each of these types of claims.

Deposit Disputes

I typically see these disputes after the buyer or seller has already prepared a cancellation agreement or the date for close of escrow has passed. If a buyer wants to cancel, they should evaluate whether they have a basis to do so before either of these events takes place. The buyer should not assume that a cancellation right does not exist or that one cannot be developed based upon a lack of contractual performance by the seller, a lack of full and complete disclosure, or common-law rescission rights. If the seller is cancelling, has the seller issued a timely Notice To Perform or (if using the C.A.R. contract) a timely Demand To Close Escrow, or has the seller otherwise tendered performance (if applicable and if using the PRDS contract)?

What boxes are checked on the cancellation agreement form and what language is used to justify the cancellation can also have an impact. This is true for both the buyer and seller. For example, a cancellation agreement indicating that it is based upon “mutual agreement” may not benefit a seller where the buyer unilaterally decides to cancel. On the other hand, a buyer who identifies only one ground for cancellation may lose the ability to rely on other grounds that existed but were not identified.

If the buyer has cancelled, the seller needs to promptly relist the property in order to mitigate any damages caused by the buyer’s cancellation. The parties should promptly clarify that the buyer does not intend to go forward with the purchase of the property. Even if the parties cannot agree on the grounds for cancellation, they should still address the issue of whether the buyer intends to go forward with the purchase and confirm that understanding in writing, whereupon the seller should then move forward with relisting the property.

While the parties may not be able to close a new escrow without having a signed cancellation, there is no reason why the seller cannot promptly relist the property while the language of the cancellation is being negotiated and finalized. If an offer comes in, acceptance of that offer should be conditioned upon and made subject to the cancellation and release of that first transaction and any claims regarding the right to buy or the obligation to sell. Any buyer who interferes with the seller’s ability to resell the property to a new buyer and mitigate damages may be exposing themselves to additional damage claims by the seller.

The parties also need to recognize that there are differences between the PRDS and C.A.R. cancellation forms with respect to whether any releases are being given between the parties in conjunction with the cancellation. The C.A.R. form includes preprinted release language, and the parties need to be aware of the scope of that release, whether it is consistent with the intent of the parties, whether any rights relating to the disposition of the deposit (including the mediation and arbitration clauses and attorneys’ fees clauses) are reserved or become part of that release, and the legal effect of that release, given that it does not include a Civil Code § 1542 waiver.

The last issue that always arises in deposit disputes is one of damages. If liquidated damages has been initialed, California law provides that a subsequent resale within six months is evidence that can be introduced to rebut the presumption that the liquidated sum represents the damages that the seller has sustained in the event of the buyer’s breach.

Issues that I have encountered lately in resolving deposit disputes include the following: (1) the seller’s decision to not resell the property, either because the market has declined or due to some other motivation, (2) a seller who purportedly has not actively and reasonably remarketed the property, (3) whether the seller acted in good faith in their resale of the property given the terms and conditions of any resale, (4) what damages the seller has actually sustained and the evidence they have to support those alleged damages, and (5) a seller who refuses to release the balance of a deposit when their actual damages are less than that amount. Resolving these issues involves the specific facts of each transaction as well as legal and equitable considerations. What is important is that the statements, actions, and/or conduct of the buyer and seller and their respective agents can have an impact on the resolution. Therefore, all parties who face these issues should consider the potential consequences of what they say and do on the disposition of the deposit before taking any action or making statements in writing.