Recap From Last Week: Last week’s Legal Tip involved a buyer who submitted offer on a 16-page C.A.R. Residential Purchase Agreement (RPA) with initials for both the Liquidated Damages and Arbitration paragraphs. The seller responded with just a one-page Seller Counter Offer (SCO), which the buyer counter signed and delivered back to the listing agent on August 3. 

We came to the conclusion that, because the boilerplate language in the SCO incorporated the RPA by reference, the parties were very likely to be in a valid, binding contract as of August 3, even though the seller did not sign nor return the underlying 16-page Residential Purchase Agreement (RPA) to the buyer until August 5. However, the August 3 final agreement excluded the Liquidated Damages and Arbitration paragraphs. The reason is the boilerplate language in the SCO specifically stated that, unless provided otherwise, “If either of those paragraphs is not initialed by all Parties, that paragraph is excluded from the final agreement” (see paragraph 1A of the SCO). Nothing in the SCO in our situation had “provided otherwise.”

Multiple Choice Question: If the listing agent in this scenario delivers to the buyer’s agent the underlying 16-page RPA fully counter-initialed and counter-signed by the seller on August 5, are the Liquidated Damages and Arbitration paragraphs a part of the final agreement? Pick the best answer:

A. Yes, most likely.
B. No, most likely.
C. It depends on whether the buyer’s agent inserted a Designated Electronic Delivery Address (DEDA) on page 16 of the RPA.
D. It depends on when during the sales transaction the question is being asked.

Answer: Answer A is not the best answer. We know from the above Recap that the Liquidated Damages and Arbitration paragraphs are specifically excluded from the final agreement of August 3. Additionally, the RPA, which was incorporated by reference into the SCO, specifically states that no provision in that August 3 final agreement can be amended “except in writing signed by Buyer and Seller” (see RPA paragraph 27). The seller’s delivery of the counter-initialed RPA on August 5 was, in effect, a proposal to the buyer to amend the August 3 final agreement.

Answer B is not the best answer either. We know from our day-to-day practice that many people believe that, under these circumstances, the Liquidated Damages and Arbitration paragraphs are somehow included in the final agreement.

Answer C is wrong. A DEDA is irrelevant in this situation. If the buyer’s agent has a DEDA, then the delivery of any document to the buyer’s side shall be deemed to occur upon the sending of that document to the DEDA, regardless of when the buyer’s agent personally receives the document. In our situation, however, the sending of the counter-initialed RPA to the buyer’s agent, and the subsequent receipt by the buyer’s agent, both occurred on August 5 anyway.

Answer D is the correct answer. Even though the buyer does not accept in writing the seller’s proposal to amend the final agreement (as explained above), the buyer may nevertheless be bound to the terms of that amendment if the buyer’s subsequent conduct is deemed as a ratification of the proposed amendment. The big problem with “ratification by subsequent conduct” is that we do not know exactly when during a sales transaction it occurs, as according to a judge, jury, or arbitrator on a case-by-case basis.

We know that early on during the transaction, such as, for example, on August 5, the seller’s proposed amendment has not been ratified, because the buyer has not done anything that can be construed as “subsequent conduct.” We also know that towards the end of the sales transaction, such as, for example, on the day before escrow is scheduled to close, it is very likely to have been ratified, given that the buyer has fully performed on the contract as if the Liquidated Damages and Arbitration paragraphs were part of the final agreement. But we don’t know exactly what will be deemed to be adequate as “subsequent conduct.” When the buyer gets the deposit into escrow? Do inspections? Sign disclosures? Negotiate repairs? Get a loan funded?

Practice Tip: To avoid any issues concerning the inclusion of the Liquidated Damages and Arbitration paragraphs, listing agents are well-advised to have their seller counter-initial, counter-sign, and return the underlying 16-page RPA along with any seller counter offer (SCO or SMCO). Alternatively, a provision can be inserted in “Other Terms” of the seller counter offer, such as: “Parties agree that Seller’s signature below shall also be deemed to be Seller’s initials agreeing to the Liquidated Damages and Arbitration of Disputes paragraphs in the RPA.”

-Thank you to Marilyn Simon (Pasadena Manager) for suggesting this week’s legal tip!

Copyright© 2022 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 August 8, 2022. 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. Written by Stella Ling, Esq.