Multiple Choice Question: You are the listing agent for a new sales transaction. The buyer has failed to submit the initial deposit into escrow within 3 business days after acceptance, as required under the C.A.R. Residential Purchase Agreement (RPA). Can the seller cancel? Pick the best answer:

A. Yes, there is no valid contract without a deposit.
B. Yes, the buyer has materially breached the contract.
C. No, the seller must first serve a Notice to Buyer to Perform (NBP).
D. No, unless the seller had already served an NBP on the date of acceptance.

Answer: Answer A is wrong. It’s true that a valid contract must have consideration. However, the consideration, or the benefit to the seller, for the sale of a $1 million home is the $1 million that the buyer will pay the seller at close of escrow. An earnest money deposit is not consideration, and a deposit is not legally required to form a valid sales contract. However, over the years, real estate professionals have come to realize that a sales transaction is more likely to go smoothly and close escrow if the buyer puts a deposit into escrow.

As for Answer B, a buyer’s failure to submit a required deposit into escrow is very likely to be a material breach of the contract. However, Answer B is wrong. Regardless of the material breach, the RPA requires a seller, before cancelling, to first deliver an NBP giving the buyer at least 2 days to deposit the required funds (see paragraphs 14D(2)(i) and 14E). Answer C is the correct answer.

Answer D is wrong. Serving on the date of acceptance an NBP for the buyer to submit the deposit is too soon. Under the RPA, the soonest the seller can serve an NBP is 2 calendar days before the expiration of the applicable time for the buyer to meet an obligation. If, for example, acceptance of a contract occurs on Monday, April 22, then the buyer has until Thursday, April 25 (or 3 business days after acceptance), to submit the deposit into escrow. The seller can serve the buyer with an NBP to submit the deposit into escrow no earlier than Tuesday, April 23 (or 2 calendar days before Thursday).

Practice Tip: For listing agents handling sales transactions on a tight schedule, it’s a good idea to advise your seller to consider serving an NBP 2 days before the buyer’s deadline to submit a deposit into escrow.

-Thank you to Nelson White and Tammy Krug (San Diego Downtown Office) for suggesting this week’s legal tip.

Copyright© 2019 Berkshire Hathaway HomeServices California Properties (BHHSCP). All rights reserved. Any unauthorized reproduction or use of this material is strictly prohibited. This information is believed to be accurate as of April 22, 2019. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals.