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Handling Amended/Revised Preliminary Reports Under The C.A.R. Vs. PRDS Purchase Contracts

By David Hamerslough

February 9, 2012

Amended/revised preliminary reports can be created when a title company learns of an event that impacts the terms and conditions under which title is to be insured or when it performs a final title search and examination just before close of escrow. When the latter occurs, it is known as a “date down” search and is intended to identify and report any events that may impact title to the property or the terms and conditions under which the title company will insure that title. When the latter occurs, the title company issues an amended/revised preliminary report, which bears a new effective date that is different than the effective date on the original preliminary report.

The PRDS and C.A.R. purchase contracts handle amended/revised preliminary reports differently where any title contingency has been satisfied/waived. Under the PRDS contract, if the amended/revised preliminary report raises an issue that cannot be removed or otherwise addressed to the buyer’s satisfaction, then the buyer should consult a qualified California real estate attorney. The issue that will be analyzed is whether the buyer has a right to rescind the transaction. Rescission may be based upon, among other theories, fraud, mistake, or a failure of consideration. What the buyer and seller knew, if anything, about the title issue, when they knew it, whether it was disclosed, etc. are just some of the facts that may impact the analysis of this issue. While the buyer should promptly consult with a qualified California real estate attorney on this issue, the PRDS contract does not contain a specific timeframe for the buyer to provide a response to the amended/revised preliminary report.

In contrast, the C.A.R. purchase contract provides that the buyer has five (5) days after receipt of an amended/revised preliminary report to attempt to exercise a cancellation right. One question that undoubtedly will be litigated at some point is whether a buyer retains common-law rescission rights under the C.A.R. contract if they fail to exercise their cancellation rights within that five-day timeframe.

Other issues that exist under the C.A.R. contract with respect to this cancellation right include the following:

(1) The five days begin “after receipt” of the amended/revised preliminary report. In most instances, receipt by the agent will trigger the start of the five-day period;
(2) The amended/revised preliminary report must be “furnished by the title company” (meaning the same title company that issued the original preliminary report);
(3) The buyer has five days to review the amended/revised preliminary report and cancel the transaction;
(4) Cancellation must be based upon the amended/revised preliminary report revealing “material or substantial deviations from a ‘previously provided preliminary report (provided by the title company designated in the purchase contract).’” No definitions of what constitutes a “material or substantial deviation” are provided;
(5) Finally, this cancellation right is set forth in ¶ 8(E)(2) of the purchase contract. It is not referenced in any other paragraph of the contract.

Notwithstanding these contractual differences, the steps that a buyer should consider taking when they receive an amended/revised preliminary report under either purchase contract are the following:

(1) Contact the title company and obtain any underlying documentation regarding the amended/revised item (e.g., a copy of the judgment, lien, easement, etc.);
(2) Buyers’ agents should consider sending an email to the buyer explaining that the amended/revised preliminary report needs to be compared with the original preliminary report. If the C.A.R. purchase contract is being used, the buyer should be reminded that they have a limited time (five days) to review the amended/revised preliminary report and cancel based on that report. This email should also advise the buyer that only their own qualified California real estate attorney can determine if the buyer has a right to cancel;
(3) Contact any third party and/or the title company to assist in assessing the impact that the amended/revised item has on title, the insurability of that title, and the timeframes for closing escrow set forth in the purchase contract;
(4) If additional time is needed to evaluate the amended/revised preliminary report and/or close escrow, prepare the proper request for any such extension in the timeframes required under the C.A.R. contract. All parties need to understand that (a) the seller has no obligation to respond to that type of request, let alone grant the extension, and (b) if the C.A.R. purchase contract is being used, the request should be made on the C.A.R. Amendment form, which includes a timeframe for a response (which should specify one day at most, given the five-day timeframe to review and cancel);
(5) Consult with a qualified California real estate attorney; and
(6) Cancel the contract in a timely manner if using the C.A.R. purchase contract or rescind if using the PRDS contract.

Additional considerations that may arise where cancellation rights are going to be exercised in this situation, either under contractual terms or the common law, include whether the cancellation is supported factually, legally, and/or equitably, whether the new item in the amended/revised preliminary report gives rise to an obligation on the part of the seller to amend their disclosures, whether a Notice to Perform is required prior to cancellation, whether the cancellation has been exercised in good faith, and whether both parties have agreed to the cancellation and the disposition of any deposit.

Brokers and agents who are aware of these differences between the C.A.R. and PRDS contracts in this regard and know the appropriate steps to take where an amended/revised preliminary report has been issued are much less likely to face a claim by a buyer who alleges that they did not understand the impact of that report or their right to cancel the contract.