The California Association of Realtors publishes forms which are used for the vast majority of residential real estate transactions in the state. The forms are well-written. They are reviewed thoroughly before publication. They are revised from time to time. Some of the changes which appear in revisions are based on the decisions of the courts interpreting this or that provision in the standard-form agreement.
Among the forms published by the C.A.R. is the California Residential Purchase Agreement and Joint Escrow Instructions. This is an eight-page form, set in small type face, which includes some detailed language designed to facilitate the sale of the property.
The form includes several built-in “contingencies.” The contingencies are events which must occur in order for one of the parties to be obligated to perform. It also provides that with respect to some of the contingencies, the buyer can be required to “waive” such contingency after the expiration of a certain period of time passes. The form makes it easy to insert the agreed-upon amount of time. It also includes default time periods which the parties can leave as-is, thereby adopting those periods of time.
Another provision in the standard-form agreement establishes a deadline by which the parties, particularly the buyer, must perform.
The default period of time the buyer has for waiving the financing contingency is 17 days. The number of days can be changed in the agreement. If the buyer doesn’t waive the financing contingency at that point, that does not mean that there is an automatic waiver of the contingency. Rather, upon the expiration of the 17 days, the seller may send the buyer a form notice requiring the buyer to perform within three days. If the buyer doesn’t waive the financing contingency within those three days, the seller may terminate the transaction.
However, the seller may not retain the deposit if the buyer fails to perform. The only remedy available to the seller is to cancel. Only if the buyer breaches after having waived the financing contingency can the seller retain all or some of the buyer’s deposit. In a residential transaction, the maximum the buyer may retain is 3% of the purchase price, as liquidated damages.
If during the three-day period the buyer waives the protection of the financing contingency, the seller may not declare the buyer to be in breach at that point. This is because the buyer still has until the end of the deadline for closing which is established in the agreement. If the deadline for the close of escrow does come and go without the buyer’s performing, there is an additional step which the seller must take before canceling the escrow. That step is the sending the buyer a Demand to Close Escrow. This warns the buyer that if escrow doesn’t close within three days, the seller may exercise the right to cancel.
If the three days goes by and the closing fails to take place, the seller may indeed terminate the contract and cancel the escrow. At this juncture, the seller is not under any obligation to agree to an extension of the time for closing the transaction. The rationale for this is that the buyer should not be allowed to continue to tie up the property, preventing the seller from seeking other buyers, indefinitely.
Nonetheless, it not necessarily black-and-white that the seller may cancel. If the buyer informs the seller that he or she will be able to close in some fairly short period of time, the seller probably would be unwise to expect that a court would allow the seller to cancel and retain the deposit. However, the more time that passes after the deadline for closing, the more defensible it is that the seller may retain the deposit.
The seller does not have to provide any reason for refusing to grant a request by the buyer that the closing date be extended. In fact, at that point, the seller probably would be wise not to state his or her reason, because doing so may generate some unforeseen issue or opportunity for the buyer to challenge the cancellation.