We Interrupt This Program … Breaking News

By David Hamerslough and Victoria B. Naidorf

May 6, 2025

Last month’s article introduced NAR’s new Multiple Listing Options For Seller’s Policy (“MLOSP”) that is intended to complement the latest revisions to NAR’s Clear Cooperation Policy (“CCP”). At that time, we intended to have this month’s article discuss some of the potential impacts on brokerage fiduciary and ethical duties that might result because of those revised policies.

However, we are interrupting that discussion because of the significant number of claims that we, and other qualified California real estate attorneys, saw last month regarding contract cancellations. We will return to our prior discussion of the MLOSP and CCP in next month’s article.

What caused the high volume of claims last month? The sudden stock market fluctuations prompted serious consumer concerns (which will probably continue to exist, at least in the short term) and resulted in several real estate deals falling apart. Many cancellations were prompted by buyers whose stock portfolios dropped significantly enough that they decided to back out of purchase transactions. Other buyers decided to back out due to concerns that they had paid too much money for the property in view of the overall direction of the market. This sort of market reaction is not new; we have seen it before. It does, however, spotlight a number of issues everyone should consider regardless of whether your clients are buyers or sellers.

Some of the problems we see stem from erroneous assumptions made by clients and/or their agents.

Erroneous Assumptions Made By Buyers In An Uncertain Market/Economy:

1. Assuming that (a) a decline in a buyer’s stock portfolio and/or (b) a dip in the buyer’s net worth and/or (c) a change in employment status (collectively referred to here as the buyer’s “Financial Position”) automatically entitles a buyer to cancel a purchase contract and get their deposit back.

Comment: Whether or not the buyer’s Financial Position may be a legitimate basis to cancel will depend on a number of factors, including but not limited to the terms of the contract (such as whether there is a properly worded contingency in favor of the buyer that authorizes cancellation if there is a negative change in the buyer’s Financial Position; whether the buyer has acted in good faith; and/or other market conditions).

When working with a buyer who is concerned about Financial Position issues, the buyer’s agent should discuss the following with the buyer:

1. 1. the propriety of including a specific contingency in the offer to address, among other issues, the price or value of the stock or the buyer’s net worth at the time of the contract, the price or value drop at which point the contingency excuses further performance, when that determination is to be made and by whom, and/or
   2. the buyer’s employment status at the time of the contract and/or any change in that status (e.g., termination, salary reduction, transfer, etc.), that triggers the contingency, and when that determination is to be made and by whom.

Ultimately, the ability of the buyer to effectively exercise this type of contingency will be determined by a mediator, arbitrator or court based upon whether the buyer was acting in good faith using an objective or subjective standard.

2. Assuming that cancellation by a buyer shortly after contract ratification means that the seller has not sustained any damages.

Comment: A cancellation by a buyer without any factual, legal, and/or equitable basis for doing so is the same whether it occurs on Day 1 of the escrow or the day that escrow is to close. If there is no basis to cancel, it is likely to be repudiation, anticipatory breach, and/or a breach of the contract. This is true regardless of the day on which it occurs.

3. Assuming that a buyer is entitled to a price reduction because the market value of the property has declined after the contract was ratified.

Comment: If this assumption were true then a seller would be entitled to an increase in the purchase price if the property appreciates in value after contract ratification and before close of escrow. The answer is the same for both principals: changes in market value do not create an automatic adjustment in the contract price.

4. Assuming that the seller will agree to cancel a contract because the buyer is concerned about their Financial Position.

Comment: A cancellation by a buyer for any reason is generally contrary to the seller’s expectations and usually interferes with their plans and/or exit strategy. The likelihood of a seller having any empathy for a buyer whose stock portfolio/net worth has declined is low.

5. Assuming that the seller will agree to cancel a contract on whatever grounds the buyer has stated in the cancellation documentation.

Comment: Preparing a cancellation that states that the contract is cancelled due to the buyer’s Financial Position does not provide grounds for a cancellation unless the purchase contract contains a contingency as described above. On the other hand, a cancellation that states that the grounds are “unforeseen circumstances,” “mutual agreement,” or “other” when there has been no discussion with the seller, much less an agreement on the seller’s part, does not accurately characterize who is cancelling and why they are cancelling.

A party who repudiates (or denies the validity of) a contract by an unequivocal refusal to perform before he/she is obligated to perform may be committing a breach by anticipatory repudiation of the contract. The language used in any cancellation or communications (e.g., emails or text messages) relating to an attempted cancellation will have a significant impact on the interpretation of the cancellation, the legitimacy of the attempted cancellation, and who gets the deposit (assuming one has been made, which will be discussed below).

Both the buyer and seller must agree to cancel a contract. If one party disagrees that the contract is or has been cancelled, additional negotiation and agreement on the outstanding issues are necessary.

If the buyer is cancelling the contract and has no intention of purchasing the property, it would be erroneous to assume that a seller is going to concur that that decision constitutes a valid cancellation “by mutual agreement”. A seller may agree to accept a buyer’s request to cancel with a reservation of all rights or claims or in exchange for the release and forfeiture of the deposit to the seller (again, assuming one has been made). The preprinted language on either the PRDS or C.A.R. cancellation form needs to be reviewed and evaluated to determine if it is consistent with any resolution of the deposit or reservation of rights and claims that are being made by the parties. As we have recommended in several prior articles, this evaluation should be made by the buyer’s qualified California real estate attorney before the buyer signs it.

6. Assuming that buyers have no financial exposure if they have not actually put the deposit into escrow.

Comment: Any buyer can cancel a purchase contract as long as they are prepared to accept the consequences of that decision. What those consequences are depends on the terms of the contract and as specified by California law. Assuming a residential 1-4 purchase, the starting point is determining (a) whether the liquidated damage clause has been initialed by all parties, (b) the deposit(s) has actually been paid, and (c) the buyer intends to occupy the property. If those conditions have been met and the buyer then breaches the contract, the seller is entitled to recover the deposit(s) actually paid up to 3% of the purchase price. This is subject, however, to the seller’s duty to mitigate their damages by reselling the property and whether the seller has actually sustained damage following the resale of the property within six months.

If the deposit(s) has not been made, or one of the other factors listed above does not exist, then the seller’s measure of damage is governed by Civil Code § 3307. That statute provides for the recovery of the difference between the contract price and the fair market value of the property on the date of the breach. The latter is often determined by the subsequent resale price, although it may also be determined by an appraisal of the property. If the market is declining, the likelihood of there being a loss to the seller is high. Whether the seller’s potential damages exceed the amount of the deposit is a factor that a buyer should consider before deciding not to make a deposit. A buyer should also evaluate their potential damage exposure before communicating any intent to cancel to anyone.

Note: PRDS has a cancellation advisory (the CCA). C.A.R.’s cancellation of contract form (CC) contains an advisory and instructions. The PRDS 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 buyer may cancel. These forms recommend that the buyer/seller carefully review the advisory and consult with a qualified California real estate attorney before cancelling. Doing so will allow the buyer/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 are other grounds supporting a cancellation that have not yet been considered by that party or their real estate licensee.

7. Assuming that there is no legitimate basis to justify cancelling or rescinding the contract.

Comment: Even if an agent suspects that the buyer may not be legally justified in cancelling or rescinding the transaction, a buyer should be encouraged to consult with a qualified California real estate attorney who may be able to see an alternative approach. Alternatively, just because a buyer thinks there may be a basis to cancel, if that perception turns out to be incorrect, there may be another justifiable basis upon which to cancel or rescind that could be identified by a qualified California real estate attorney.

A buyer should evaluate the potential grounds for cancellation and how to approach the seller if they do want to cancel before communicating to anyone their intent to cancel and the grounds therefor. While a buyer may not be limited to any grounds that are communicated, once a ground has been communicated, it can be much harder for a qualified California real estate attorney to identify and communicate other grounds that would justify a cancellation.

Finally, communicating an intent to cancel and/or preparing and delivering a cancellation starts a process that involves a number of factual, legal, and/or equitable considerations for all parties.

There are strategies and arguments that can be employed by both the buyer and seller that can be impacted by the statements communicated by the buyer to their spouse and/or partner, their agent, and/or others, as well as those communications from the buyer’s agent to the seller’s agent. Remember that all of these communications will be discoverable in the event that there is a dispute, and those communications will be relied upon by the opposing party and their attorney to support their position.

There are also options that a seller has under the C.A.R. contract where the buyer has not made their deposit. These include issuing a Notice To Perform (“NTP”) regarding that issue and then requiring that the buyer complete performance and close escrow. If the seller has then fully performed and delivers a Demand To Close Escrow (“DCE”), a buyer may have exposure to damages for breach of contract that are not in any way capped by the liquidated damages provisions. Any outcome may also be impacted by any communication indicating an intent to cancel and/or a cancellation having actually been delivered.

Erroneous Assumptions Made by Sellers in an Uncertain Market/Economy:

1. Assuming that a buyer cannot cancel a contract provided that the buyer is willing to accept the consequences.

Comment: Some of those consequences have already been identified (e.g., issues related to liquidated damages vs. breach of contract damages, whether the deposit has been paid, what options exist in that event, whether specific performance is an available remedy, etc.).

2. Assuming that there may not be a basis for the buyer to cancel and/or rescind the contract.

Comment: Sellers need to understand that a qualified California real estate attorney who is assisting a buyer in attempting to find a basis upon which to cancel and/or rescind a purchase contract is going to evaluate, among other things, the quality and completeness of the seller’s disclosure (TDS, SSC/SPQ), whether all historical documents have been provided, whether the contract has been filled out so that all essential terms have been agreed upon between the buyer and seller, and what the consequences are to the seller given the amount of liquidated damages that have actually been paid (assuming they have been paid), what the property is likely to resell for in relationship to those recoverable damages, timing and expense that may be involved in reselling the property, and other factors.

While a seller will undoubtedly be disappointed and perhaps upset that a buyer wants to cancel, a seller needs to evaluate all of the foregoing factors before responding to a buyer’s communication regarding cancelling and/or the delivery of a cancellation form.

3. Assuming that there is only one solution if a buyer wants to cancel.

Comment: One tactic that is often forgotten when a seller is upset that a buyer is cancelling, is the possibility of renegotiating the terms of the contract. Even if it means lowering the purchase price, renegotiating with a buyer who is already interested in the property may ultimately turn out to be a better business decision for the seller in some situations. Consultation with a qualified California real estate attorney and the seller’s agent on all of these issues, including the likely resale price, will assist the seller in evaluating the risk factors and reaching a decision.

This article has discussed some of the factual, legal equitable, and practical issues that arise when buyers and sellers make erroneous assumptions in an uncertain market. Agents, their brokerages, and buyers and sellers have weathered uncertain financial times in the past and will undoubtedly do so again. What is important for all of these parties to keep in mind is that the strategies for writing/negotiating contracts and the tactics involved in cancellation are highly dependent upon market factors and the personal needs of the principals. Therefore, there is no one-size-fits-all contract or cancellation document that will work for clients in all markets. Any decisions with regard to the resolution of these issues should take into consideration the attorneys’ fees and costs that will be incurred, as well as the time and stress involved in a claim of this nature.