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September 19, 2021

It’s the Law: How to cancel a real-estate agreement

When a seller and buyer enter into a purchase agreement for real property, both of them intend to perform under the agreement. Most purchase agreements give the buyer various reasons for it to cancel the agreement and not proceed with the purchase.

In that event, the buyer almost always receives its deposit back. However, in a recent California case, a buyer cancelled the escrow because the seller failed to deposit the deed by the closing date. However, because the buyer had failed to deposit the purchase price, the court ruled against the buyer and it lost its deposit.

In the recent California case of “Conservatorship of Buchenau,” Mario Tornel and Martha Silva entered into an agreement to purchase a single-family residence in Van Nuys. They deposited $25,400 into escrow and the escrow was scheduled to close on Sept. 30, 2008.

When the Sept. 30, 2008 closing date arrived, the seller had not deposited the deed into escrow and the buyer had not deposited the balance of the purchase price. On Oct. 15, 2008, a friend of the buyer emailed the escrow company that the buyer wanted to cancel the escrow and their deposit to be refunded to them.

It was on Oct. 19, 2008 that the seller then deposited the deed into escrow and was ready to close escrow. Even after the deed was deposited into escrow, the buyer refused to close escrow and purchase the property.

The seller then petitioned the probate court for an order to cancel the sale, to retain the buyer’s deposit and to allow the seller to put the property back on the market.

The buyer’s primary argument against this was that since the seller had failed to deposit the deed with the escrow company before Sept. 30, 2008, that the buyer had no obligation to deposit the purchase price or to go through with purchasing the property.

The trial court disagreed with the buyer and ruled for the seller. The trial court reasoned that the buyer had also breached the agreement by failing to deposit the balance of the purchase price with the escrow company prior to Sept. 30, 2008. In other words, the buyer had failed to perform under the contract.

The court said that the buyer could not use the fact that the seller failed to perform as a reason to justify the buyer’s failure to perform, and thus the buyer had actually breached the contract.

Furthermore, the court reasoned that the seller did perform by depositing the grant deed on Oct. 19, 2008. The court stated that since time was not “of the essence” in the purchase agreement, that the seller could have a reasonable time to deposit the deed, and that being 19 days late was, conceivably, a reasonable time.

Once the deed was deposited with the escrow company, the buyer was given the opportunity to deposit the purchase price but failed to do so.

Since the buyer never tendered its performance under the purchase agreement, meaning that the buyer never deposited the purchase price, the buyer had breached the purchase agreement and therefore was not entitled to the return of its initial deposit.

The buyer appealed this ruling to the appellate court, and the appellate court again ruled in favor of the seller. The appellate court confirmed the trial court’s reasoning and said “even if time for performance has expired, a party cannot claim default by the other party as justification to terminate the escrow without either performing or having tendered performance to the other party.”

The fact that the buyer never deposited the purchase price with the escrow holder even after the deed was deposited on Oct. 19 showed that the buyer never met its contractual obligations under the agreement.

If the buyer had deposited the purchase price even after Sept. 30, 2008, then it would have performed under the purchase agreement and the court may have reached a different decision.

Based upon this case, it is important that if either party to a real estate contract wants to cancel the escrow, then that party must be certain to have performed all of its obligation under the purchase agreement even if the other side has not performed.

A party performing all of its obligations under a purchase agreement shows that it is acting in good faith and that it has complied with the agreement.

However, if a party fails to perform under the agreement and wants to cancel the purchase, the other party may invoke this case and that may result in a less than favorable outcome for the party that wants to cancel the agreement.

If you find yourself in this situation, you should consult with a real estate professional or a real estate attorney to review your options.

This column is the work product of Lombardo & Gilles, LLP, which has offices in Hollister and Salinas. Patrick Casey is an attorney with L+G, LLP. You may contact the author at (888) 757-2444 or [email protected] Mail your questions to Patrick Casey, It’s the Law, c/o The Pinnacle, 350 Sixth St., Ste. 102, Hollister, CA 95023.

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