With the real estate market making a slow but steady recovery, we have started to get questions we have not heard since 2006: questions about home sellers who want to back out of sales contract. Here is a short explainer of what can and cannot be done pursuant to California law.
WHAT IS THE CONTRACT
The starting point for determining if or when a contract can be broken is looking at the terms of the contract. For the most part, sales contracts in California will be the form used by the California Association of Relators (CAR).
WHEN THE SELLER OR BUYER CAN BACK OUT OF THE CONTRACT
The seller can back out of the contract when the terms of the contract allow the seller to do so. That could be when the buyer is not ready to close on the closing date (i.e. not obtaining the required financing) or it could be when the buyer does not fufilll some other contingency in the contract.
Likewise, the buyer can back out of the contract when the terms of the contract allow it. For example, this could be when the buyer does not obtain the required financing or when the property apprisal is below the contract price. This could also be within the 17 day deadline in the CAR contract for the buyer to complete his or her investigation or approve the disclosures provided by the seller.
OPTIONS FOR THE BUYER WHEN THE SELLER WANTS TO BACK OUT OF THE CONTRACT
These days, it is more likely the seller that wants to back out of the contract. If the seller does not have the right to back out of the contract, the buyer can claim money damages or seek to force the sale. Money damages would include any money spent by the buyer in the purchase process (i.e. inspection fee, appraisal fees, loan application fees).
If the buyer wants to force the sale, the buyer can file what is known as a specific performance lawsuit. If the buyer meets the requirement to obtain specific performance, the court will order the seller to complete the sale of the property. The requirements to obtain specific performance include (1) that the contract can be enforced; (2) that the sales price is adequate [i.e. fair enough]; and (3) that the buyer is ready, willing, and able to complete the purchase [i.e. the buyer can prove it had adequate liquid assets or a loan commitment to complete the sale]
Also, if a buyer files a specific performance lawsuit, the buyer should record a notice of lis pendens. A lis pendens is record that a lawsuit is pending over the ownership of the property. This will make it unlikely that the seller will be able to sell the property to another buyer in the meantime as another buyer is not likely to want to buy a property whose title is under dispute.
OPTIONS FOR THE SELLER WHEN THE BUYER WANTS TO BACK OUT OF THE CONTRACT
If the buyer wants to back out of the contract in a manner not allowed by the contract, then under the CAR contract, the seller can seek to recover the deposit paid by the buyer. The seller can also seek to sue for specific performance, although that is not practical in a rising market.
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