Welcome to our latest episode of Inside Real Estate.
Our topic today is, can a seller cancel a contract? It’s an interesting question. California is a consumer protection state. In a real estate contract, it’s the purchaser who is generally considered the consumer. Understand as a seller that all of the contingencies and most of the rights accrued to the buyer side of the table because they’re buying an unknown. In general, it’s a little trickier for sellers to cancel a contract. There’s two different scenarios for a seller canceling the contract.
The first one is before all contingencies are removed. If you’re in contract with a buyer and they are not performing, they’re not removing their contingencies in a timely fashion, they’ve stopped responding, they’re not taking the action they’re supposed to take in the contract, the seller can cancel the contract after issuing what’s known as a notice to perform. Which is an official document that puts the buyer on notice that if they don’t take the action stipulated, removing the contingency, putting their deposit in escrow, et cetera, within two days, which is the default timeframe, after that two day period, the seller can go ahead and cancel the agreement. The seller does have rights to enforce and cancel the contract during the contingency period.
However, once the buyer removes all contingencies, it is extremely difficult for a seller to cancel the contract. I see this pop up once or twice a year where a seller changes their mind or the house they’re buying falls through or something occurs that makes the seller not want to sell the house. Very difficult. In general, the seller, if you try to cancel an agreement after the buyers removed their contingencies and has performed, you’re looking at a very expensive situation where you could be culpable for hotel costs and additional moving costs and all kinds of costs to put that buyer up because you have essentially at that point likely breach the contract and that makes you responsible for those costs. It can get very expensive.
If you persist and just refuse to sell, refuse to sign your closing papers, refuse to cooperate in any way, then it can get really expensive as well because you’re talking about mediation and then arbitration, which is very expensive. And generally what I’ve seen over the last 30 years, the seller does not win in that situation. Matter of fact, buyer can take you to court and get a court order mandating that you sell the property to them plus give them some damages for their expenses out of the pocket. So be very careful when you’re a seller. When you sign that contract, you have to assume that you’re going to have to close escrow on it. There’s generally not a provision in there that gives the seller the opportunity to cancel the agreement. You would have to insert one in the form of an addendum or some kind of language in the contract. And most buyers are somewhat uncomfortable with that because the buyer is risking everything, their inspection costs, their firm plans. And if the seller pulls the plug, it really puts them in a tough situation.
As always with any legal situation, please do seek qualified legal advice from an attorney for your specific situation.