October 15th, 2018 at 11:30 am
Multiple Choice Question: If the seller serves a 2-day NBP for the buyer to deposit the remaining funds, and the buyer fails to perform within the next 2 days, can the seller cancel the agreement, yet be entitled to keep the $10,000 already in escrow as liquidated damages? Pick the best answer:
A. Yes, because the buyer defaulted by failing to deposit the remaining $20,000 into escrow.
B. No, because the seller must return the deposit to the buyer if the seller cancels after serving an NBP.
C. It depends on the reason for the buyer’s cancellation.
Answer: Answer A is wrong. It’s true that the buyer breached the agreement by not depositing the remaining $20,000 yet. However, the law makes a distinction between a material breach that has a legal effect, and an immaterial breach that does not. The Residential Purchase Agreement (RPA) completely circumvents the materiality analysis for this situation by specifically addressing how it will be handled.
Answer B is correct. The RPA specifically states that, if a seller cancels after serving an NBP requiring the buyer to deposit funds, the seller must authorize the return of the buyer’s deposit (paragraph 14D(2)). In other words, the seller’s right to cancel after serving an NBP and waiting out the 2 days, comes at a price. That price is the seller must return the deposit to the buyer.
Answer C is also wrong, but it nicely addresses the seller’s entitlement to the deposit if the seller does not cancel. After all, the seller can serve the NBP for the additional deposit, but then just wait to see what the buyer does next. If the buyer then cancels for a legitimate reason, all funds should be returned to the buyer. But if the buyer cancels without the right to do so, what we are guessing will likely happen, the seller will have a valid claim for the $10,000 already deposited.
-Thank you to Margaret Tom (Pasadena Office) for suggesting this week’s legal tip.
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