May 2nd, 2013 at 7:48 pm
As you can imagine, there are many parts of the Residential Purchase Agreement that cause confusion. Among the issues most commonly giving rise to questions is the liquidated damages clause in paragraph 25. Agents are often unsure what it means, or even if it is part of their contract. With that confusion in mind, here is a little explanation.
1. ? ? First, liquidated damages are only a part of the contract if paragraph 25 is initialed by both the buyer and seller. Even if the buyer’s offer includes that clause, if the seller signs an acceptance but does not initial liquidated damages, it is not part of the contract. In fact, the Counter Offer form makes this point explicitly: “Paragraphs in the Offer that require initials by all parties, but are not initialed by all parties, are excluded from the final agreement unless specifically referenced for inclusion in paragraph 1C of this or another Counter Offer.” (Counter Offer, paragraph 1A.) In other words, to be part of an agreement, both parties must explicitly signify their intent to agree to this clause. Without that, or with only one party’s acceptance, liquidated damages are not part of your contract.
2. ? ? Next, please understand that liquidated damages is intended as a protection for the buyer. As you know, in a normal case, if the buyer breaches its contract, the seller would be entitled to recover all the damages they suffered. The only requirement is that they prove what those damages are. In the case of liquidated damages, on the other hand, the parties agree to an amount up front and, if a breach occurs, the seller gets that amount, no matter what his actual damages are. So, even if buyer’s breach cost the seller $100,000, if the liquidated damages were only $10,000, that is all the seller gets.
3. ? ? Additionally, liquidated damages are limited to “the deposit actually paid.” (RPA, paragraph 25.) As a result, if the contract calls for a deposit of $25,000 and the buyer only actually deposits $10,000, then upon breach, assuming liquidated damages is part of the contract, the seller only gets $10,000.
4. ? ? Liquidated damages can only be 3% of the purchase price, by law. As a result, if the seller wants more than that amount given to him as a “nonrefundable deposit,” there must be an explanation as to what the amount above 3% is. After all, if the seller gets to keep that money on the buyer’s breach, then the court will assume it is damages and is covered by the liquidated damages clause. So we cannot just say something is “nonrefundable.” Unless that extra (above 3%) is reasonable and supported by independent consideration (like an option) the buyer could probably get the overage back if they wanted to go to court and fight.
5. ? ? Finally, if your client asks you whether they should initial this clause, try not to answer directly. After all, this is a strictly legal issue and we don’t give legal advice. However, paragraph 47 of the Statewide Buyer and Seller Advisory (CAR Form SBSA) gives a great explanation of this clause. As a result, refer your client to that document. That referral lets them understand the clause without you being required to give legal advice.
As always, please contact your manager with any questions you may have. They will contact the Legal Department if necessary.
April 27th, 2013 at 7:47 pm
I came across two issues this week that I thought would be worth sharing with you.
First, we had a couple of transactions that either cancelled at the last minute or were delayed because the seller did not order the City Report or HOA documents in a timely manner. Remember, those documents, along with the NHD, carry buyer contingency rights with them. Paragraph 4(B)(2) of the RPA covers City Reports, paragraph 6 covers the NHD and paragraph 7 covers the HOA. Each of those items is incorporated into the contingency section of paragraph 14, where the buyer has 5 days to cancel the transaction “if any report,…for which Seller is responsible is not Delivered within the time specified…” As a result, if representing the seller, you need to remember that by not ordering these items immediately, you may be lengthening the buyer’s contingency periods. This issue is most prevalent with the City Report and the HOA documents, since they often take a very long time to receive. So don’t wait to order them. Don’t wait until escrow is opened and have escrow do the ordering for you. Instead, order these items when you take the listing. Then, when you get an offer they will be ready to go and you will get all contingencies removed in a timely manner. This practice will better protect your seller. Given today’s market, the property will eventually sell and the reports will be needed. So there is no reason to wait. Order these items up front.
Next, as we have discussed before, we are seeing buyer’s do a lot of aggressive things in order to get their offers accepted. One of the most common things we see is the waiver of all contingencies. Buyer’s believe that if they waive their contingencies, the seller will feel more comfortable with them and will more likely pick their offer. While this is true, you need to be aware that this “waiver” may not always be effective. While I think it is possible to waive the contractually created contingencies (like HOA or title), certain cancellation rights are created by statute and I do not believe those can be waived. For example, and as you know, the Civil Code requires that the seller deliver a TDS to the buyer and provides the buyer with a 3 day right to rescind after that delivery. Even if an offer “waives” all contingencies, I still believe the buyer is entitled to the TDS and can cancel if he doesn’t like what it says. The same is true for the NHD and Lead Based Paint disclosure. So, if you represent a seller where this kind of offer comes in, please make sure they understand this issue. If they believe the deal is truly airtight, and the buyer then exercises his statutory right to rescind, the seller’s anger will surely be directed towards you.
As always, please contact your manager with any questions you may have and they will contact the Legal Department if necessary
April 19th, 2013 at 7:46 pm
As you know, when an offer is made by one party to another, the receiving party is normally in control of the process. Upon receipt of that offer, a buyer or seller can create a binding contract by simply accepting the offer and delivering it back to the other side. In our present market, however, this process can create problems for a seller, especially early in the listing period. After all, it is not unusual for a seller to receive an early offer that they want to entertain. On the other hand, they don’t want a contract finalized because they want to see if other, higher offers come in. By countering the original offer in the normal way, the seller is allowing the buyer to create a contract merely by accepting and delivering it back. So, what can the seller do to change this dynamic and keep control of the offer/acceptance process?
In truth, a couple of very simple changes to paragraph 4 of the Counter Offer form (CAR Form CO) provide your seller with the protection they need. First, in the title to that paragraph, “MULTIPLE COUNTER OFFER,” cross out the word “MULTIPLE.” Remember, in our scenario, we are early in the process and only have one offer for the property. As a result, we cannot say that we have multiple offers. That would be a lie. Next, cross out the first sentence of paragraph 4, which reads as follows: “Seller is making a Counter Offer(s) to another prospective buyer(s) on terms that may or may not be the same as in this Counter Offer.” (Below is an example of how to make these changes.) Again, in our scenario, that statement is not true. At the moment, we are only making one counter, to our Buyer No. 1. With those changes made, our clause no longer makes any misstatements. Instead, it tells the buyer that we are making a counter offer and changes the method of acceptance. Rather than our buyer having the power of acceptance, our counter-offer says that acceptance will not be binding “unless and until it is subsequently re-Signed by Seller…” In other words, if Buyer No. 1 accepts our counter and delivers it back to the seller, no contract is created. Rather, there is no contract until the seller re-signs. As a result, the seller now has control and decides when a contract is created.
So, when you think you have a popular property, but get an early offer from a buyer that you want to keep interested, make these changes. Two simple cross-outs give your seller control. But remember to make those changes so you do not make any misrepresentations to the buyer. That would only cause problems.
As always, please contact your manager if you have any questions and they will get the Legal Department involved if necessary.
April 12th, 2013 at 7:43 pm
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.
April 5th, 2013 at 7:42 pm
As we have discussed many times in the past, today’s market has brought out numerous questionable and frustrating practices. One of these, when not done correctly, is the pocket listing. In these cases, the property is not put in the MLS but is instead marketed through word of mouth or through informal marketing groups. Invariably, it seems, the property is sold to a buyer represented by the listing agent and our buyers feel cheated. So, has the listing agent done anything wrong in this scenario? The question, as usual, is not so simple to answer.
First, the easy part of this discussion relates to the MLS Rules. As you know, those Rules require that all listings be submitted to the MLS within 2 days of signature. In the pocket listing context, of course, we are not doing that. As a result, without more, we are violating the rules. The Rules do, however, provide an exception if the seller refuses to permit that the property be advertised in the MLS. In that case, you can keep the property out of the MLS if you get the seller to sign CAR form SEL, Seller Instruction to Exclude Listing from the Multiple Listing Service or Internet. By getting that written instruction, you are complying with the Rules and cannot be subject to a Board complaint.
The other, more difficult part of this equation is your fiduciary duty to the seller. As you know, as the seller’s fiduciary, it is our obligation to put the seller’s interests above our own. As a result, our desire to double end the deal, which often happens with a pocket listing, should be irrelevant to us. Instead, we should care only about doing what the seller wants. In most cases, that means getting the the highest possible price for their home by exposing it to the widest market possible. Of course, such exposure would only be helped by putting the property in the MLS. In some cases, however, that is not our seller’s top concern. Some sellers are more concerned about privacy and don’t want their house held open to the public at large. Some value confidentiality, and therefore want the marketing of their property limited. Others are concerned about theft, and don’t want pictures of their home on the internet or MLS. Of course, your seller has the right to decide what matters most to them. As a result, it is our job to make sure they consider all these issues and instruct us how to proceed.
As a result, the key in this situation, as in most others, is disclosure. In order to properly handle a pocket listing, you need to explain to your seller that by marketing the property this way, they are limiting its exposure and may therefore negatively impact its price. The SEL form explains this issue to some extent, so using it helps. But make sure to be real clear: A wider marketing campaign may get you more money. But it also may negatively impact your privacy, etc. Then your seller can decide and tell you what to do. More importantly, by having this discussion you have done your duty. It is really that simple. So don’t feel the need to go away from pocket listings. They are a fine practice as long as you handle them correctly. And when you do so, you can earn your full commission and have no worries about future problems.
Attached for your reference are two items: a CAR article and Q&A on this subject. If you have any additional questions, please contact your manager, who will get the Legal Department involved if necessary. Thanks.
