Real estate purchase agreements in general, and the California Association of Realtors Residential Purchase Agreement (“CAR Purchase Agreement”) specifically, contain certain contingencies for the transaction. Under the contingencies in the CAR Purchase Agreement, the buyer can disapprove certain subjects of the transaction allowing the buyer to cancel the escrow and receive back the buyer’s deposit in full, minus any costs incurred by third-party services. However, there is much confusion among real estate agents regarding what subjects are embraced by each contingency and what constitutes a proper disapproval of a particular subject in the contingency.
Although there a multitude of contingencies that might be applicable to a particular transaction, the CAR Purchase Agreement contains the following six common contingencies:
· Loan: contingency for the Buyer to obtain the loan designated in the purchase agreement (Section 3.J.(2))
· Appraisal: contingency for the Property to appraise at no less than the purchase price (Section 3.I.)
· Reports/disclosures: contingency for the Buyer to receive, review, approve, and sign the disclosures and reports from the Seller (Sections 10.A.-E., 14.B.)
· Buyer’s investigation: contingency for the Buyer to investigate the physical condition of the Property (Sections 11., 12., and 14.B.)
· Title, preliminary report: contingency for the Buyer to receive, review, and approve the current preliminary title report from the title insurer (Sections 13. and 14.B.)
· Common interest (HOA) disclosures: contingency for the Buyer to receive, review, and approve the required HOA documents provided or ordered by Seller (Sections 10.F. and 14.B.)
Although the contingencies in the CAR Purchase Agreement are broad and mostly within the Buyer’s discretion, there are limitations on the Buyer’s exercise of a contingency right. First, in California, every contract or agreement has an implied covenant of good faith and fair dealing. (Guz v. Bechtel National, Inc. (2000) 24 Cal.4th 317, 349–350) The implied covenant of good faith and fair dealing requires that a party with “discretionary power affecting the rights of another” must exercise such power in good faith. (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 371–372) Hence, the implied covenant of good faith and fair dealing implied in the CAR Purchase Agreement requires that a Buyer must exercise a discretionary contingency right in good faith. Thus, for example, the Buyer may not exercise the cancellation right under the Buyer’s investigation contingency because the Buyer dislikes the color of paint in the master bedroom. Similarly, the Buyer may not exercise the cancellation right under the Buyer’s appraisal contingency because the property appraised at the purchase price, when the Buyer thought that the property would appraise higher than the purchase price.
Although there are many contingencies contained in the CAR Purchase Agreement, the following are not specified contingencies in the CAR Purchase Agreement:
· Furniture: The parties to the contract may negotiate an up-front purchase price for the furniture, but there is no contingency allowing the Buyer to cancel the transaction due to the condition or value of the furniture.
· Request for repairs: Although the Buyer may request that the Seller make certain repairs identified during the inspections or request that the Seller provide a credit, the Seller is under no obligation to provide repairs or a credit or to even respond to the request. There is no contingency for certain repairs to be made during escrow.
However, nothing prevents a Buyer from making the above or any other subject matter a contingency of the purchase agreement.
Buyers and Sellers must understand and review the applicable contingencies in their unique purchase agreement, which may or may not be the same as the above.
Esquire Real Estate is available for consultation on real estate contracts and represents buyers and sellers in California real property transactions. Esquire Real Estate can create customized contracts, including unique contingencies, for the protection of all parties to a real estate transaction.