Can you legally cancel your real estate transaction, or real estate listing, over Coronavirus (COVID-19)? What options does a buyer have to cancel, what about the seller, what about the REALTOR®?
No doubt, real estate transactions are being canceled over fears surrounding Coronavirus (COVID-19) and related economic impacts.
Local real estate markets have seen an enormous percentage of listings switching to “hold”, “withdrawn” and “canceled”, i.e. being taken off-market, presumably by sellers that want to ride out the storm and do not want strangers touring their homes. Similarly, there is a pattern of once “pending” listings (ie. those once in escrow and under contract), coming back to “active” (i.e. available) or directly to an off-market status.
In other words, existing deals are being canceled and the sellers are left to decide if they want to put the property back on the market, or simply cancel (or postpone) their listing.
But that raises all sorts of contractual questions. Remember, there is not only a contract between the buyer and seller, but also between the seller and the listing agent/REALTOR® brokerage (and often between the buyer and the buyer’s agent).
CAN I CANCEL?
Does the buyer (or seller) have a contractual right to cancel a real estate sale (or listing) due to Coronavirus (COVID-19)?
That answer depends on a great number of factors, including your contract, where in the timeline you are, and what you can negotiate with the other parties involved.
Generally speaking, absent a direct impact to you or your transaction (i.e. someone seriously ill and cannot sign documents, an escrow company closing, county recorder’s office not accepting filings, etc.) Coronavirus (COVID-19) itself is unlikely a basis for unilateral cancelation of a sales contract or listing agreement; however, it could formulate the basis for a legitimate cancelation as part of the buyer’s due diligence, in the same manner a buyer can generally cancel for any number of reasons (i.e. home inspections, review of city permits, discovery of nearby registered sex offender, inability to secure a loan, etc.).
It is critical to review the documents, discuss with appropriate parties, and seek swift resolution before the anger boils over into an expensive dispute.
STEP ONE – REVIEW THE CONTRACT!
Foremost, you must review your contract and determine the cancelation procedure, if any.
Most real estate contracts, such as the ubiquitous Residential Purchase Agreement by the California Association of REALTORS® contain a clear timeframe for buyer’s due diligence contingencies (such as review of reports, inspections, documentation, and practically most anything the buyer wants to look into) and outlines specific procedures for cancelation by the buyer. In other words, a buyer generally has a set timeframe to change their mind over anything they don’t like about the property, the deal, etc.
However, at some point, the buyer must remove those contingencies and agree to proceed. If the buyer does not remove their contingencies by the applicable deadline, there is an express procedure by which the seller must force the buyer to proceed or cancel.
Thus, to the extent a buyer has their contingency timeframe(s) still open, any cancelation is likely permissible, and this could include general apprehensions surrounding Coronavirus (COVID-19) and/or the greater economic implications.
Think of it this way, if a buyer lost their job while in escrow to purchase a home, or discovered something they did not like about the property, they would likely cancel. That has always been the case; but is likely to be exacerbated in this current crisis.
However, if the buyer had already removed all their contingencies, simple anxiety about the current crisis may not be enough to warrant a cancelation and may leave the buyer’s deposit in jeopardy.
Liquidated Damages Clause?
The technical and legal issues behind the deposit rule are far beyond this article, nothing is guaranteed, but generally speaking, once the contingencies have been removed, a buyer cannot cancel. If the buyer does cancel after removing contingencies, the seller is potentially entitled to keep the buyer’s initial deposit (up to 3% of the purchase price). There are many exceptions to this provision.
A seller, on the other hand, rarely has the ability to cancel the sale once the contract has been signed. Sometimes a seller creates a contingency such as the purchase of a replacement home, but such terms are specifically written into the contract, or via a separate form, etc. By default, the Residential Purchase Agreement contains no seller ability to cancel, so long as the buyer performs their obligations.
Listing Agreement Cancelation?
Likewise, a seller that desires to simply cancel or postpone their listing has a contractual commitment with their listing agent/REALTOR® and the listing brokerage.
As with a buyer, simple anxiety is generally not a basis for cancelation. While a seller has a right to refuse an offer, the seller may not technically or automatically be able to cancel their listing.
Practically however, few REALTORS® sue their clients over canceled listings, hoping instead to simply regain the listing at a later date.
STEP TWO – TALK!
Talk with your REALTOR® (or jump right to legal advice). Talk to the other party. A seller may empathize with a buyer that wants to cancel; maybe the seller is reconsidering too. However, it is also possible the buyer or seller will be irate and threaten legal action, etc.
If you do not like the options presented or need a second opinion, ask to speak to the real estate office Broker (i.e. the manager or supervisor of the real estate company) and/or seek legal advice.
Do not sign anything you do not feel comfortable signing or if you do not understand.
STEP THREE – SEEK RESOLUTION ASAP
If you cannot reach an agreement, seek resolution, perhaps via a third-party professional, i.e. a Mediator. The standard Residential Purchase Agreement and the Listing Agreement both require the parties to attend a mediation session prior to filing a lawsuit or arbitration claim. This can be an exceptional opportunity to resolve a dispute prior to dramatic escalation.
Many mediation providers, such as this office, provide online “virtual” mediation services and can be arranged within a few days at reasonable rates. The California Association of REALTORS® Mediation Center for Consumers is another excellent resource.
Know that cancelations are not uncommon in any market and disputes surrounding the initial deposit can ideally be resolved. While apprehension and fear are understandable, they may not alone be a basis for cancelation. Likewise, sellers must accept a changing marketplace and be prepared to adapt or postpone upon agreement with their REALTOR®.
Review your contract, talk with the parties and professionals and seek a swift resolution. Sometimes real estate disputes can get ugly and expensive, and the quicker you seek a resolution, the better.
Author Devin R. Lucas is a Real Estate Attorney, Broker and REALTOR®, specializing in Newport Beach, Costa Mesa and Orange County coastal communities, serving individual and investors in residential real estate.
Mr. Lucas is a professional real estate mediator available with the California Association of REALTORS® Mediation Center for Consumers.
Mr. Lucas is a property owner, landlord and operates a small, local, property management business.
Lucas Real Estate
Real Estate Law & Transactions
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2901 West Coast Highway Suite 200
Newport Beach | California | 92663-4023
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