Ask the Brokers – Time is of the Essence

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We received this question yesterday from a reader:

If a buyer of a home has gone past the agreed contract amount of time and has not released contingencies can they be penalized for anything or amount of money? In this case the buyer agreed to a 15 day contingency removal and it is now 18 days with no response. I know the 24 hr notice is a possibility, but just wondering if their are any rules or penalties on this issue? Thanks!

In answering the question, first I will assume that you are speaking to a contract written on the California Association of Realtor’s standard Residential Purchase Agreement. That being the case, the contract does include buyer contingency provisions. The default language specifies that all buyer contingencies including loan and appraisal be removed in writing within 17 days. It sounds like, in your circumstance, that a shorter 15-day contingency removal period was negotiated, which is fairly common practice.

By way of background, the purchase agreement of yesteryear (pre 2000) specified a passive method of contingency removal. This meant that once time frames had come and gone, related contingencies were deemed to be removed. Conversely, the contract now in use employs an active method of contingency removal which requires that the buyer affirmatively remove a given contingency in writing. Absent this written removal, the contingency in question remains in effect.

The importance of the buyer’s removal of contingencies is naturally related to the disposition of his earnest money deposit, and the amount of the deposit which is considered customary will vary by region. Here in San Diego, a customary deposit is considered approximately one percent of the purchase price. Until contingencies are waived, the buyer can effectively cancel the contract without penalty, that is, take his money and go home. Once all contingencies have been waived, however, any failure to perform is considered a breach and the earnest money is at risk. This is where the earnest money comes in. I always advise our selling clients that the amount of the deposit is important only in that it should be sufficient enough to “hurt”. One must keep in mind, however, that a purchase agreement is a bilateral contract. It takes two sets of signatures to enter contract and two sets of signatures to undo the mess. If your buyer has breached, you may be entitled to retain his deposit as damages, but his signature is required by your third-party escrow to release the funds to you.

Now, let’s assume that the buyer has failed to remove all contingencies within contractual time frames. What’s a seller to do? Unless the contract has been otherwise modified to include penalties, your only remedy is to issue a Notice to Perform (NOP). By default, the NOP gives the buyer 24 hours to perform (do what they are supposed to be doing), and many agents negotiate a longer NOP period, usually no more than 72 hours. If after this period they have still failed to perform, the seller may cancel, and with the cancellation, the buyer would be entitled to… take their money and go home.

When the standard contracts were modified to include the active method of contingency removal by default, attorneys told us that this was intended to take the guess work out of who gets the money in a parting of the ways. The prior “passive removal method”, they held, was largely responsible for their most common disputes – disputes involving who gets the green stuff.

Practically speaking, the buyer holds all of the cards until they sign on that contingency waiver on the dotted line. When acting as the seller’s agent, we are often forced to use the NOP, but it is not so much a hammer as a rubber mallet. With the seller’s only remedy being cancellation (and presuming the seller doesn’t really want to cancel and start over again 15 or 17 days into contract), you have got to ultimately hope that you have a well-intended buyer who is going to respond favorably. If you as the seller issue an NOP and the buyer continues to ignore his contractual obligations, you need to be prepared to cut bait and put your home back on the market.

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