Buyer’s (or seller’s) remorse becomes a legal issue when the buyer or seller does not want to close after they are under contract to buy or sell. This is true for commercial, residential or vacant lot property. Documentation is critical for claim prevention.
Let’s take a look at what the listing agent and the selling agent need to do to avoid a real estate lawsuit.
The Listing Agent’s Dilemma
The listing agent has a dilemma when his or her seller client does not wish to close. Documentation throughout the process, including before the client makes this decision is essential. Listing agents should have this documentation:
- A dated and signed listing agreement— A signed listing agreement in and of itself is evidence that the seller intended to sell his or her parcel.
- A contract with a buyer—This is obviously part of the file. The contract is the documentation that creates the dilemma. It confirms the seller’s intent to sell on certain terms, conditions and at a certain price.
- Recommendation to consult an attorney—In a situation where the seller advises his or her agent that he or she is having “seller’s remorse,” the listing agent must advise the seller, in writing, to immediately consult with an attorney about the desire to not close the transaction or escrow. The agent must add that recommendation in the transaction file.
- Recommendation regarding contacting the selling (buyer’s) agent—The listing agent should document in the transaction file, whether the seller wants the listing agent to send the buyer’s agent an email about the desire to not close.
- Recommendation of a cancellation —If the seller confirms in writing that the listing agent is to communicate the desire not to close, the listing agent should recommend a cancellation of the transaction or escrow with the return of the buyer’s earnest money deposit where the seller pays nothing to the buyer for the cancellation. If that does not work, the listing agent, on behalf of the seller, should recommend an approved monetary payment by the seller to the buyer for a signed and dated cancellation of the transaction or escrow.
Ideally, the buyer will agree to one of the two recommendations above. If the buyer is not receptive to the above suggestions, then the seller must hope that the buyer will not waive all contingencies in the transaction in a timely manner. If the buyer waives all contingencies and elects to close with an unwilling seller, the listing agent should advise the seller in writing to consult with an attorney to defend against an anticipated specific performance and breach of contract lawsuit by the buyer.
This is important to the listing agent, because should a lawsuit be filed, most likely the listing agent will be brought into the litigation by way of cross complaint by the seller. This is why it is so important for the listing agent to document all of the pieces listed above.
The Selling Agent’s Dilemma
When the buyer does not wish to close, the selling agent’s dilemma is usually not as complicated a process. If the buyer has not waived all contingencies in writing, the buyer can simply sign and date a cancellation of transaction or escrow with a request for the return of his or her earnest money deposit. The agent then sends the document to escrow (or to the attorney handling the transaction) and the listing agent.
If the buyer has waived all contingencies, but after doing so does not want to close:
- The buyer can send a signed and dated cancellation of the transaction or escrow to the escrow officer (or to the attorney handling the closing) and the listing agent
- Where the earnest money deposit is deemed forfeited under most Residential Purchase Agreements, if and only if the “liquidated damages provision” in the agreement has been initialed by all parties in the agreement and the amount of the liquidated damages is clearly stated in the document.
For the selling agent, the “liquidated damages” provision in any land purchase agreement is a very important provision protecting the buyer. It sets the ceiling of what the buyer’s damages would be in a transaction if the buyer does not want to close after waiving all contingencies in the transaction. (More on Liquidated Damages in CA)
When the selling agent has a buyer who does not want to close a transaction that he or she is in contract to buy, the selling agent should document in writing the following things:
- Advise the buyer to immediately consult with an attorney
- Reference the options of: a) canceling the transaction/escrow where the earnest money is returned if not all contingencies have been waived, and b) if they have all been waived, the earnest money is forfeited.
As the selling agent in a transaction, you should advise your client in writing to hold off waiving all contingencies to the very last moment. You should also recommend in writing that a liquidated damages provision be included in the purchase agreement and in a dollar amount as low as possible. Explain in writing that such dollar amount could be forfeited and why.
Documentation throughout the process is critical when it comes to real estate claim prevention. To avoid real estate lawsuits when clients in contract do not want to close escrow, know what you need signed before your client wants to back out, know what recommendations to make, and put it all in writing.
About the Author
B. Edward McCutchan, Jr.
Sunderland | McCutchan, LLP
Mr. McCutchan’s practice is primarily civil litigation with an emphasis in defending professionals and businesses in real estate, mortgage brokering, construction, banking and agricultural industries and all phases of dispute resolution through trial and appeal. His area of practice is also agricultural law (viticulture and wineries), trusts and estates, probate, real estate transactions, business law and elder abuse. B. Edward McCutchan, Jr. was admitted to the Bar in 1985 and is admitted and qualified to practice in all California courts and the U.S. District Court, Eastern and Northern Districts of California as well as the United States Tax Court.