The Noncontingent Blues
By David Hamerslough
March 30, 2021
The noncontingent blues is not a new tune, especially in our real estate market – just one that repeats itself periodically. The conditions that cause this to recur remain largely the same (e.g., low inventory, multiple offers, buyer fatigue, the belief/need to write as clean an offer as possible, a buyer belief that the market will resolve any damages caused by a breach, and a seller belief that "noncontingent offers worked for my neighbors, so why won’t it work for me?", etc.).
So why am I writing this article? Because of the number of claims being made as a result of this tune. These claims disrupt the expectations of both buyers and sellers and cost time, money, and anxiety for buyers, sellers, agents, and brokers.
The claims I have been handling involving the noncontingent blues have arisen out of the following fact patterns:
- The buyer discovers something about the condition, use, or utility of the property that is contrary to what is in the seller’s disclosures or the experts’ reports or the buyer’s expectations as to how they can use or improve the property;
- The buyer needs or wants to obtain financing to complete the purchase and either does not qualify or there are delays in that process;
- The property does not appraise for the purchase price;
- The buyer discovers that they cannot obtain insurance for the property or that the cost of that insurance is significantly higher than they expected;
- The seller discovers that they cannot find a suitable replacement property; or
- The seller’s ability to purchase their replacement property is in jeopardy, as is their deposit on that transaction.
Once any of these scenarios occurs, the following accusations, rationalizations, justifications, and arguments are made and/or expectations are expressed:
- The seller knew, or must have known, about the adverse condition, issue, and/or problem with the property and failed to disclose it and insisted that the contract be made noncontingent so that the buyer would not find out the truth;
- The buyer claims that the seller must provide an amended disclosure document or the buyer is otherwise entitled to rescind based upon common law principles;
- The buyer claims that everyone knew that they were getting a loan and the inability to do so (on the terms the buyer wanted) and/or any delays in obtaining that loan are not the buyer’s fault;
- The buyer doesn’t have the funds to make up the difference between the contract price and the appraised value;
- The buyer claims that the inability to obtain or afford insurance prevents the buyer from obtaining financing or claims that they can’t afford to complete the purchase because of the additional insurance costs;
- The buyer mistakenly believes their damages are limited to the liquidated damage sum, even if the deposit has not been put into escrow;
- The seller claims that the buyer knew that the seller needed to find a replacement property and is not going to move out until they find another property;
- The seller claims that buyer must pay for any lost deposit on the seller’s replacement property transaction and/or any increase in the purchase price, due to market conditions, of any replacement property transaction;
- The seller expects to keep the deposit irrespective of what the property may resell for; or
- The seller thinks they can move on to the next transaction and the buyer will just quietly walk away and forfeit any money they deposited.
An analysis of all of the facts, motivations, legal theories, and/or equities that impact the ultimate outcome of the noncontingent blues that arise out of the preceding examples are too varied to discuss in this limited article. Some of these include whether the seller had actual knowledge of the defect, issue, and/or condition that is being raised by the buyer, whether the buyer was otherwise aware of it or put on inquiry notice that it should have been investigated, whether any disclosure by the seller was full and complete, what advisories and disclosures were provided to the buyer and seller, the timing of the delivery of those documents, the materiality of any such fact, whether the buyer acted reasonably and justifiably, what damages (if any) exist as a result of that defect, issue, and/or condition, whether the liquidated damage clause was initialed, whether the deposit was actually paid, whether the property was to be 1-4 owner occupied, when and for what price the property resells, what are the contract terms on any of these issues, what other communications and/or actions have been expressed or taken between the agents and between the agents and their clients on these subjects, what negotiations (if any) took place between the parties to address any of these issues, what statements and/or actions were or were not taken by the buyer’s and seller’s agents with their clients and with the other agent, whether it was a dual agency, what advice and counsel was provided by the real estate licensees to the buyer and seller, whether common law grounds for rescission exist (such as mutual mistake), what are the equities between the parties, what it would cost to retain attorneys to mediate, arbitrate, and/or litigate the issues in dispute, can those attorneys’ fees and costs be recovered, etc.
As I’ve said in previous articles, given all of these variables, predicting the outcome of these types of disputes is challenging. What is not challenging is predicting the time, cost, anxiety, and risk involved for not only the buyer and seller but also the real estate agents and brokers representing those parties, who invariably get brought into these claims.
At times, the noncontingent blues can be avoided if the risks associated with that tune are discussed with both the buyer and seller in a timely manner and their expectations with regard to this type of transaction are reasonably set. PRDS and C.A.R. both have a "Market Conditions Advisory" and other forms that address some of these issues. If that type of documentation is delivered to a client before the contract is prepared, the liability analysis can change. The discussions and advice and counsel provided in conjunction with the delivery of that type of documentation, and the knowledge, training, skill, and experience of the buyer/seller and their respective agents, are additional factors that may have an impact on this type of claim.
Both the PRDS and C.A.R. contracts also contain language regarding the issues and risks associated with the noncontingent blues.
In spite of the foregoing, buyers and sellers still write and receive noncontingent offers. Whether they are doing so with a full appreciation of the risks associated with those offers is one of the issues that continues to repeat itself in the claims that arise from such offers. This article has discussed only some of the recent market trends that are producing these claims and some of the risks associated with them. If a buyer or seller has any questions or concerns regarding this subject, then a consultation with a qualified California real estate attorney may be appropriate.