We often receive calls from buyers and sellers who are a party to a residential purchase agreement that has been cancelled or is about to be cancelled. The question on their minds is “who gets the good-faith deposit?” One reason why this is on their mind is that, given the value of real property in the San Francisco Bay Area (and particularly in Silicon Valley, San Francisco, and Marin), the good-faith deposits are quite sizeable. We have seen a significant rise in these disputes over the past couple years, which appears to be based in large part on the prevalence of non-contingent deals.
The answer to their inquiry is typically multi-layered and will most likely require an in-depth review of the purchase agreement along with the other transaction documents, the parties’ actions, and the circumstances surrounding the failed deal. This article will briefly touch on these areas.
The Contract
The first subject for analysis is to determine whether someone breached the agreement. In order to make this determination, the contract needs to be analyzed. While the CAR (California Association of Realtors®) purchase agreement and the PRDS (Peninsula Regional Data Services) purchase agreement are the most often used in the Bay Area and Silicon Valley, there is no statutory requirement that they be used. The terms of these purchase agreements can and will differ.
Once the contract has been reviewed, the circumstances where the buyers can cancel the deal and recover their good-faith deposit should be known. Depending on the terms of the contract, the buyers may have the right to cancel the contract (e.g. through the exercise of a contingency [property condition, loan, or appraisal] or based on a failure of the sellers).
The Parties
The actions of the parties may also have an impact on who receives the deposit. Even if the buyers do not have the contractual right to cancel the deal, the buyers may still recover their entire deposit based on the conduct of the sellers.
The Code
There are also statutory provisions that may be dispositive regarding whether the liquidated damages provision is enforceable. For example, under certain circumstances, a buyer may be able to argue that a subsequent sale of the property within six months of the buyer’s default undermines the validity the liquidated damages provision. Additionally, whether the good-faith deposit was appropriately deposited into escrow can have an impact on the validity of a liquidated damages provision.
Conclusion
Both the buyer and the seller want to lay claim to the good faith deposit funds. As can be seen by the above discussion, it imperative to fully understand your rights (as a buyer or seller). Once understood, it is possible to make an informed decision in resolving a good faith deposit dispute.
If you have any question about your rights in regards to a residential real estate purchase, or any other real estate-related issue, please contact us at 408-290-8228. We look forward to assisting you.
DISCLAIMER: The information presented in this article is for informational purposes only, and should not be construed as legal advice. There is no intent to create an attorney-client privilege or relationship. Any content excerpted from this article must contain this disclaimer. The information contained in this article is not confidential, and is not intended to be a solicitation.