As you know, it is not that uncommon for a buyer to look for a way to get out of a contract they signed. Whether they simply got cold feet, or have some real issue (lost a job), a buyer needing to cancel the contract without an obvious reason for doing so is a regular occurrence. So, how is that cancellation accomplished? After all, both California law, and the specific language of the Residential Purchase Agreement (RPA) require that “[a]ny removal of contingencies or cancellation under this paragraph by either Buyer or Seller must be exercised in good faith …” (RPA, paragraph 14.) Obviously, if there is a title issue they can use the title contingency (assuming they still have it). The same is true for contingencies regarding the loan, appraisal and HOA documents. But what if the issue is less clear? Can the buyer use their investigation contingency for almost any reason, and if so, are they acting in good faith?

In order to answer that question, we need to look at paragraph 10 of the RPA, the clause defining the buyer’s investigation rights. In that clause, the buyer is told that their acceptance of the property’s condition is a contingency of the Agreement. They are told that they have the right to conduct inspections regarding a number of things, “including, but not limited to,..” lead based paint, termites, insurability and “any matter specified in the attached Buyer’s Inspection Advisory (CAR From BIA).” In other words, the clause creating the buyer’s right to an investigation contingency specifically says they should consider the matters identified in the BIA. Now, as you know, that Advisory is very broad, covering things from the general condition of the property to its size to earthquakes to its neighborhood. As importantly for our issue, at the end of paragraph 15 of the BIA, the Buyer is told to investigate the property for “personal needs, requirements and preferences of Buyer.” In other words, pursuant to the terms of the RPA, the Buyer’s investigation, and therefore contingency rights, should explicitly include the buyer’s personal needs and preferences. Obviously, this is a very broad investigation.

So, what does this mean? In my view, this means that as long as the buyer has their investigation contingency, they can legitimately cancel the transaction for almost any reason. Even if the seller does not agree, or thinks the issue is silly, the real question is whether the cause of cancellation could, in good faith, be called a buyer need, requirement or preference. Of course, almost anything can fall within this category, thereby giving the buyer a cancellation right.

There is, however, one important thing to remember. Even if we believe that your buyer has right to cancel his deal, the seller may disagree. Without going to court and getting the judge’s view on each party’s actions, there is no objectively right answer to whether the buyer has cancelled in good faith. As a result, an angry seller could refuse to sign cancellation instructions or refund the buyer’s deposit, even if we think he is wrong. We cannot put a gun to his head and make him do the right thing. So, when you sense the possibility of conflict, do not get too specific about why the buyer cancelled. On the cancellation form, just reference paragraph 14 (the generic contingency clause) rather than a particular contingency. If pressed, merely say the cancellation is based on the investigation. Again, that leaves your buyer with as many options as possible.

So if your buyer needs to cancel a deal, remember to use the investigation contingency if possible. It is the broadest cancellation right he has and therefore gives him more legitimate ways out of the deal. As always, if a question regarding this issue arises, please contact your manager and they will call the legal department if necessary.