What recourse does a property buyer have when cancelling their purchase during the contact's contingency period?Q:   I entered into a residential purchase agreement and during the contingency period, I determined that I would not be able to develop the property the way I want to because of the zoning restrictions.  I gave timely notice to the seller of the exercise of my right to cancel the agreement, but the seller has refused to sign the document the escrow company says it needs to cancel the escrow and return my deposit.  What can I do to get my deposit back?

A:  In the California Association of Realtors residential purchase agreement (“RPA”), a buyer has a certain period of time to perform investigations of the property and provide the seller with a notice of the buyer’s cancellation of the contract.  If the buyer gives written notice of cancellation pursuant to the rights of the buyer under the RPA, both the buyer and seller agree to sign mutual instructions to cancel the sale and escrow and release deposits back to the buyer, less the fees and costs incurred.  The RPA provides that release of the funds will require mutual signed release instructions that are typically provided by the escrow company handling the transaction.  Most escrow companies will require the execution of such instructions, in the form of amendments to the escrow, to disburse the funds being held by the escrow company event if it appears that the buyer has a clear right to the money on deposit.

The problem arises when a seller, disappointed at the decision by the buyer to not complete the escrow or disagrees that the buyer has the right to cancel the contract for the reason stated, decides not to sign the escrow amendment cancelling the escrow and providing for return of the deposit to the buyer.

For example, a seller may want to sue the buyer for specific performance of the RPA and the seller may erroneously believe that it will jeopardize such a lawsuit by signing an amendment canceling the escrow.  However, cancellation of the escrow with a return of the funds on deposit does not by itself terminate the parties from liability under the purchase agreement or escrow instructions unless the amendment specifically provides that it bars such further liability.

California’s Civil Code provides that it is the “obligation” of a buyer and seller who enter into a contract to purchase and sell real property to ensure that all funds deposited into an escrow account are returned to the person who deposited the funds or is otherwise entitled to the funds under the contract, if the purchase is not completed by the date set forth in the contract for the close of escrow.  Any seller who fails to execute any document required by the escrow holder to release funds on deposit within 30 days after a written demand for the return of the funds is liable to the person making the deposit for the following specified items.

First, the liability of the seller shall be for the amount of the funds on deposit that are not held in good faith to resolve a good faith dispute.  This means that the seller will not necessarily be liable for the funds if the seller has a “good faith dispute” concerning the buyer’s performance of the contract or right to the funds.  Good faith dispute is defined to mean a dispute in which the trier of fact finds that the party refusing to return the deposited funds had a reasonable belief of his/her legal entitlement to withhold the deposited funds, and the existence of a good faith dispute shall be determined by the trier of fact.

Second, the seller shall be liable for treble the amount of the funds on deposit of at least $100, but not more than $1,000.  Therefore, if there is no good faith dispute, the seller may be liable for three times the amount on deposit or a maximum of $1,000.

Third, the seller shall be liable for reasonable attorneys’ fees incurred in recovering the above penalties.  This statutory attorney fee provision is in addition to the provision in the RPA that provides for attorney fees in any action, proceeding, or arbitration between buyer and seller arising out of the RPA.

Any lawsuit for the return of the deposit or for the statutory penalties for noncompliance should be preceded by a demand for mediation under the RPA because it provides that if a demand for mediation is not first presented, any party that commences an action without first attempting to resolve the matter through mediation shall not be entitled to recover attorneys fees, even if they would otherwise be available to that party in any such action.  However, this mediation requirement does not apply to any matter that is within the jurisdiction of a small claims court, which may be up to $5,000, or even $7,500 if brought by a “natural person”.

Upon the commencement of a cause of action to recover the penalties outlined above, the escrow holder is required to deposit the disputed funds into the court where the action is commenced, less any cancellation fee and charges it may have incurred.

Therefore, the prudent manner of proceeding when a seller refuses to sign mutual instructions to cancel the sale and escrow and release the funds depends upon the amount of the funds being held in the escrow.  If the funds are approximately $6,500 or less, the buyer could decide not to request mediation (and incur any fees associated with retaining an attorney to handle the mediation) and instead, file a small claims court action for the $6,500 funds on deposit and for treble damages in the maximum amount of $1,000, for a total claim of the jurisdictional limits of $7,500.  If the funds are greater than $7,500, the buyer could retain an attorney to make a demand for mediation.  If the claim remains unresolved after mediation, and the parties have initialed the arbitration provision of the RPA, the buyer can proceed to arbitration and if successful, may recover reasonable attorneys’ fees in addition to the funds on deposit and the maximum sum of $1,000 for treble damages.

The opinions expressed in this article are those of the author, and they do not create an attorney-client relationship or constitute legal advice.  Individual circumstances may vary and professional advice is recommended before making any decisions concerning legal matters.  

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Forry Law Group: Real Estate and Civil Attorneys

15501 San Fernando Mission Blvd., Suite 309
Mission Hills, CA 91345
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