THE DEMAND TO CLOSE ESCROW – HOW SHOULD IT BE USED

January 12th, 2013 at 7:28 pm

I am getting a lot of calls recently about how to cancel an escrow where one of the parties fails to close on time. In most cases, the buyer’s loan is running late and, as a result, the seller wants out. They have lost their patience with the present buyer and want to move on to buyer no. 2. The question, of course, relates to the best way to accomplish this goal. And, as you undoubtedly know, that way now includes the Demand to Close Escrow (CAR From DCE). So, how does the DCE work and how should you use it?
The first thing to remember is that a Notice to Perform (NBP) is NOT the appropriate document for a deal where one party wants to cancel because the other has not closed on time. From a lawyer’s perspective, the reason for this is easy: the contract does not provide for using an NBP in this circumstance. As you know, the use of an NBP is set forth in paragraph 14C(1) and (2) of the Purchase Agreement. In those clauses, the seller is given the right to cancel, “after first delivering to Buyer…” an NBP, if the buyer does not remove contingencies on time or does not perform the following contractual obligations: make their deposit, make their deposit with good funds, deliver a preapproval letter, provide their verification of funds or return the statutory disclosures. Notice that closing escrow on time is not included in this list. As a result, when looking at what the NBP was created for, we do not see a failure to close.

Additionally, both paragraphs 14C(1) and (2) provide that, after giving an NBP and upon cancellation, the seller shall “authorize the return of Buyer’s deposit.” Obviously, in the case of a late close of escrow, the seller may not want to do that. After all, the buyer’s failure to close on time may be a breach. So, by using the NBP in this case, you may be unintentionally forfeiting your seller’s right to keep the buyer’s deposit.

On the other hand, the DCE is specifically provided for the late close situation. Paragraph 14E of the RPA states that “[b]efore Seller or Buyer may cancel this Agreement for failure of the other party to close escrow pursuant to this Agreement, Seller or Buyer must first give the other a demand to close escrow.” In other words, the contract specifically says to give a DCE in our circumstance. The DCE itself is consistent with what we are looking for, demanding that the escrow be closed “within 3 (or _____) Days After receipt of this…” DCE. It further provides that when given by the seller, she may (1) cancel the agreement; (2) sue for damages; or (3) sue for specific performance. The buyer may sue for damages or specific performance.

One question that has arisen in relation to the DCE is whether the number of days the Demand must include can be changed. After all, as you can see above, there is a blank that theoretically can be changed to some number other than 3. On the other hand, paragraph 14E, the only clause in the Purchase Agreement that even mentions the DCE, says nothing about how long the Demand must be. So, can you put any number in the blank? While the contract gives not direct answer, the best advice we can give you is no. The case law says that since close of escrow rarely happens when scheduled, demands to cancel cannot come out of the blue and be too short. That is why the 3 day period was chosen. As a result, the shortest period you should use is 3 days. If you want the demand period to be longer, you can use the blank for that. But don’t make it shorter. You will risk making your demand ineffective.

As always, please let us know if you have any questions.

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