The California housing market continues to face challenges and uncertainty since Governor Newsom’s shelter-in-place order went into effect on March 19th. Realtors® are navigating the new territory of helping their buyers and sellers in the midst of stay-at-home and distancing requirements to prevent the spread of COVID-19.
California Association of Realtors® shared in the April 27th market report that the “new purchase index increased 2% from the week prior [. . .] but new purchase applications remain subdued as they are 31% lower than the same week of last year.”
Realtors® are as essential as before the pandemic started, providing guidance as their clients complete the most significant transactions of their lives. The additional pressures of mass unemployment and health complications can create the perfect storm for bad faith cancellations.
California courts routinely hold California contracts contain an underlying implied covenant of good faith and fair dealing. Parties cannot unfairly interfere with another party’s performance of the contract or prevent the parties from benefiting from the contract. What happens when a party unilaterally decides to cancel the contract and there are no remaining contingencies? Is this unilateral cancellation without a specific reason (i.e. failed financing or the inability to negotiate home inspection repairs) grounds for a bad faith claim by the seller? What if the seller is the party who cancels the contract?
Was it a bad faith cancellation? A bad faith cancellation may occur when a party intentionally creates a situation that would cause the contract to terminate or unilaterally cancels the contract without cause. Examples would be a seller who blocks access to the property for an inspection; a buyer who neglects to deposit funds in escrow; or a buyer who inappropriately uses force majeure to cancel.
Jeffrey Discher, Associate Broker with the Discher Real Estate Group, shared that his agents are facing similar issues. “It’s basically a non-contingent transaction for both buyers and sellers due to the CVA (Coronavirus Addendum) that can be exercised. At this point, it comes down to properly managing the transaction, contingencies, and timelines. By shortening the contingency periods, it expedites the buyer and seller to get everything required by contract done ASAP and forcing both to have some skin in the game. It’s also important to be in constant contact with the buyers’ lender from pre-acceptance and all the way through the escrow period to properly plan for any hiccups that may arise. At the end of the day, we are limited.”
Most California real estate agents use the Residential Purchase Agreement (RPA) published by the California Association of Realtors®. Paragraph 14 and its subparts deal specifically with contingencies and cancellation rights. A buyer has the most leeway and a near unconditional right to cancel a contract if there are contingencies remaining. Even after the expiration of the contingencies, if the buyer has not formally removed the contingencies and the seller has not sent a Notice to Buyer to perform, the buyer can still cancel the contract.
On a personal note, at the beginning of the pandemic, my family was attempting to sell my late father’s home. When the markets tanked, the buyer spooked and canceled the contract with no contingencies remaining and no continuation of contingencies afforded to a buyer like in the California RPA. Had this occurred in California, we would likely have had a bad faith claim against the buyer. It’s an emotionally charged situation for both the buyer and seller and with the guidance of a great agent and legal counsel, the parties can get through it and move on.
It is imperative that buyers and sellers, and their Realtors®, continue to act in good faith when entering into a purchase agreement. Protect yourself and your clients by having a real estate attorney review the contract and advise you on the legal concerns you have with a contract or resolving disputes.
Rebecca Larson is a California Real Estate Attorney with a strong background in advanced real estate transactions leveraging her experience as the former owner of a title and settlement company. She advocates for Realtors®, homeowners and investors in their real estate sale transactions. She is a shareholder at So. Cal. Realty Law, where she assists clients with resolving real estate disputes, managing risk, and preventing future liability. She is licensed to practice in California, D.C., and Virginia.