Legal Question in Real Estate Law in California

Re: If no loan contigency is mentioned, is it implied?

You are required to use reasonable efforts to obtain the mortgage. If you decide not to get the loan, then you are canceling the escrow and breaching the agreement. You might have an argument to lessen the liquidated damages because of the seller's prompt response. But the seller also has obtained an attorney and has had additional costs to sell the property, so it sounds like a compromise might be in order.

Re: If no loan contigency is mentioned, is it implied?

Your question raises a few issues.

First, you state that you "cancelled" escrow. Are you sure? Likely, I suspect you requested that escrow be cancelled but that it has not been cancelled. Escrow may only act at the joint consent of all parties to the escrow; given the facts, I suspect that your seller has not agreed for a cancellation of escrow (and hence, your down is still tied up in escrow).

Second, regarding the loan contingency, in the absence of a stated contingency period, the law will generally imply a reasonable time period, or at the very minimum, imply that you must use reasonable efforts to obtain a loan. If this weren't so, then buyers could wiggle out of escrows merely because they changed their mind about buying the property.

Third, your question raises the issue of whether the seller has been damaged at all. Even in today's flattening market, values are not dropping, which means that generally, even if a buyer cancels, the seller may very likely turn around and sell at a higher price than with the breaching buyer. Of course, there are costs incurred that are incidental to the escrow. This is one of the reasons why liquidated damage provisions are common in real estate sales/purchase agreements. Properly drafted, liquidated damage provisions are absolutely enforceable. Typically, the buyer will throw 3% deposit into escrow (as good faith), and it's no coincidence that the liquidated damage provision also is set at 3%.

Fourth, you do not state what's going to happen to the agents' commissions. Presumably, there are agents involved? If you are able to extract yourself from this situation, as part of the deal, you must obtain releases from the agents of their respective claims for commission. While the listing agent would not likely have a claim (given these facts), your agent may very well have a claim against you, depending upon the terms of your agreement with him/her.

Finally, if the house is already in the process of being sold to another buyer, then the seller may be motivated to resolve this issue with you. If you were to get nasty, you could simply decide to go through with the sale and that would theoretically place the seller on shaky ground with his next buyer, if that buyer has already gone hard on the deal and locked in to buy the property.

If you are truly unable to consummate the deal, then the best bet is to reach out to the seller with the proverbial olive branch and try to work out a settlement. Perhaps let the seller keep a few thousand dollars.

If it doesn't work out and things go south, seek out the advice of a competent real estate litigator. We are civil litigators with extensive experience in real estate litigation. If/when you have a need for guidance, please feel free to call or email. Good luck.

Re: If no loan contigency is mentioned, is it implied?

I'd like to add a couple of thoughts to Mr. Guerrini's reply, which I agree with.....

First, cancelling escrow would be only a part of the process to terminate your deal with the builder. What you really need to do is rescind the contract. This can almost always be done by mutual agreement, and sometimes by one party for good cause, but I don't see a ground for rescission in the facts presented. You would need to get the builder's OK, or you'll most likely be in breach of contract.

Which brings me to the "implied contingency" you suggest may arise from the provision "mortgage loan to be obtained by buyer." As I read this, I see no implied contingency. Getting a mortgage loan is an affirmative duty placed upon the buyer, just as a line reading "builder to use six-inch studs in all exterior walls" places an affirmative duty on it. Getting the loan is probably a condition precedent to the close of escrow and transfer of title to you, but that doesn't mean your failure to perform rescinds or voids the contract; rather, it is presumably a material breach and entitles the builder to damages.

An interesting side issue is presented by this requirement to get a mortgage. Suppose you won the lottery and were in a position to pay cash. Could the builder still insist that you obtain a mortgage, relying on this provision? Here, I think a judge would find an implied waiver of the get-a-mortgage provision if its functional equivalent, cash, were being offered instead. But failure to come up with the purchase price because you changed your mind, or even because you didn't qualify for a loan, looks like a breach and not the (non-)occurrence of a contingency.

Finally, on the matter of liquidated damages. The usual meaning of the term "liquidated damages" in the context of a real-estate purchase agreement is a dollar amount, agreed to in advance by the parties, which will be forfeited by a breaching party to a non-breaching party, and which is fixed in advance as the parties' best estimate, at that time, of what actual damages are most likely to be.

Therefore, if there are no actual damages, the existence of a valid liquidated damages clause is not to the benefit of the breaching party, since he still has to forfeit the pre-agreed amount. On the other hand, if the non-breaching party's actual damages were much higher, the breaching party is protected. It's like a deductible on insurance.

There's no magic to the 3% number. It comes from Civil Code section 1675, which sets 3% as a ceiling for liquidated damages clauses in residential purchase contracts. Courts are inclined to disfavor liquidated damages clauses as an intrusion on judicial prerogative, and will overturn them for slight deviation from what's permissible, so you might want to read sction 1675 to look for a loophole.

Re: If no loan contigency is mentioned, is it implied?

I doubt it. I haven't seen the contract, but I think you are in breach and may have forfeited your deposit as liquidated damages. I would have to review the contracts to be sure.