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The Cancellation Epidemic

May 19, 2021

It’s official – cancellations of residential purchase contracts by both buyers and sellers have reached epidemic proportions. In response thereto, PRDS has introduced a new form, the PRDS® Cancellation of Contract Advisory (“CCA”). This article discusses why the CCA was developed and how it should be used.

The cancellation epidemic exists because of a combination of market factors, including low inventory, competition amongst buyers, buyer fatigue/frustration, non-contingent (a.k.a. contingency-free) offers by buyers, sellers cancelling in hopes of selling for more money, sellers cancelling because they cannot find a suitable replacement property or do not have a well-thought-out exit strategy, and general nervousness on the part of both buyers and sellers regarding the direction the market is taking.

These factors have resulted in buyers, sellers, and/or their real estate licensees sending communications (primarily emails) stating that the contract is being cancelled and/or preparing, signing, and delivering a written cancellation based on grounds that (1) don’t exist, (2) are not justified by the facts and circumstances, or (3) are not justified by the terms of the contract or California law.  Communications sent and/or cancellation documents prepared under these circumstances have created an incredibly high volume of claims, resulting in lost productive time, increased stress, lost deposits and commissions, as well as the expenditure of significant attorneys’ fees on the part of buyers, sellers, and real estate licensees.  Communicating a client’s intent to cancel and/or transmitting poorly prepared cancellation documents can also potentially deprive a buyer or seller of the opportunity to rely on an alternative basis to support the cancellation and may result in a premature, unwanted disposition of the deposit as well as a claim against the real estate licensee.

The new PRDS® CCA form was developed to help counteract the cancellation epidemic and reduce the risks that buyers, sellers, and real estate licensees are facing when dealing with a cancellation.  The CCA underscores that it is the buyer or seller, not the licensees who need to determine which cancellation rights, if any, apply.  It also explains that real estate licensees cannot provide any opinions or determine whether, factually and/or legally, that any cancellation is justified.

The CCA should be provided to an agent’s or a broker’s client (whether the buyer or seller) before there is any attempt (either orally or in writing) to cancel the contract or as soon as the agent or broker is notified that the other party may cancel. It recommends that the buyer or seller carefully review the advisory and consult with a qualified California real estate attorney before cancelling.  Doing so will allow the buyer or seller to understand, among other issues, the potential financial and legal consequences of cancelling the contract, whether that party is acting in good faith, and/or who may be entitled to any of the funds deposited in escrow.  Consultation with a qualified California real estate attorney may also establish that there may be other grounds that would support a cancellation that have not yet been considered by that party or their real estate licensee.

The CCA does recognize that there will be circumstances where a consultation with a qualified California real estate attorney may not be necessary before the cancellation takes place. This might occur when there is an undisputed, mutual agreement between the buyer and seller to cancel the contract and there is no disagreement over the disbursement of any funds deposited into escrow.  As noted in the CCA, any cancellation of the contract should also include a release of all right, duties, and obligations regarding the contract.  Under this circumstance, the parties should use the PRDS Cancellation of Contract (CC) form.  The CCA has a box that can be checked to indicate that the CC is attached.

On the other hand, if the parties do not have a mutual agreement on all of these issues, then the parties should consider consulting with a qualified California real estate attorney before any attempt is made to communicate that cancellation and definitely before preparing any cancellation documentation.

If the CCA is provided to clients in a timely manner, the form can help prevent a buyer or seller from cancelling a contract without a proper basis for doing so; it can also properly alert the clients of the need to consult a qualified California real estate attorney before attempting to cancel without fully understanding the financial and legal consequences of doing so.

PRDS believes that the CCA will help control the cancellation epidemic. A “Termination of Contract” advisory is also about to be issued by the San Francisco Association of REALTORS® with the same goal of minimizing the negative impacts of that epidemic.  At present, there is no plan for the California Association of REALTORS® to provide this protection on a statewide basis.