In my law practice, I often counsel buyers who are in escrow and can cancel escrow as they have not released some contingencies, but the Seller refuses to release the buyer’s deposit.
In California, if you are using the C.A.R. (California Association of Realtors) RPA (Residential Purchase Agreement) form, the buyer can elect to have several types of contingencies.
In some cases, it may not be clear to a buyer or agent whether a particular “issue” is covered by one or two different contingencies. This is where the buyer’s agent must discharge his or her Fiduciary Duty of Care, Diligence and Loyalty and advise the Buyer to either seek legal advice or not remove any contingencies until all due diligence items are clarified, lest they be in jeopardy of losing their deposit.
For example, let’s suppose you are a Buyer and you have made it clear to your agent that “square footage” of the house is very important for you. Your agent advises you to release your “physical inspection” contingency while you wait to release your “appraisal” contingency. Let’s further suppose that you may not receive complete and accurate information regarding square footage until your appraisal report comes in, and you have not received the report yet.
How safe is it for you to remove your “inspection” contingency even if you still have your appraisal contingency open, despite your agent’s assurances to move forward with the sale?
The NAR and California Code of Ethics and the Standard of Care in California set the bar high for real estate agents and brokers, in terms of what their obligations are to their clients.
In California, Agents and brokers are held to be “fiduciaries.” Under California law, fiduciaries are held to a very high standard much like “Trustees” of a trust.
In these circumstances, I believe that California’s “standard of care” and the law of fiduciary duty requires that a real estate agent not advise their client to lift contingencies rather protect their client by creating the necessary time and space for the client to receive, review and understand the ramifications of the material information obtained prior to lifting a contingency.
Creating this time and space, free from pressure, starts when a real estate agent is first drafting the offer. It continues in the “manner” in which the agent documents the client’s file so as to make the client’s subsequent requests be deemed “reasonable.”
Creating additional time may become increasingly difficult if the agent is a dual agent. Dual agency is fraught with peril and covered in my other posts.
The best practice is to draft long enough contingencies and set them all to expire at the latest date possible, so as to avoid this type of scenario.
In this particular case, the appraisal contingency will not be the appropriate vehicle to use to cancel escrow due to square footage issues, if the buyer has already removed his “physical inspection” contingency.