Collecting the Escrow Deposit and Specific Performance — Part 4 of the CAR Forms

In Part 3 of this series on April 5, 2018, we examined liquidated damages and its relationship with the RPA. Liquidated damages are the hammer that sellers have when a buyer breaches the RPA. After that article, several questions came in regarding how to go about collecting that escrow deposit when the buyer breaches and the potential to sell the property while the escrow deposit is in dispute. Both are legitimate issues.

 Under the RPA the parties to a transaction typically initial the arbitration clause located at section 22B. The provision requires that if there is a breach the parties must engage in mediation followed by arbitration. In most situations, the value of the escrow deposit related to the cost of mediation and arbitration makes pursuing the escrow deposit cost prohibitive. However, it is important for the seller to seek legal advice related to the contract because there is carved out. While typically the parties would look to mediate and then arbitrate, under section 22C(1) matters falling within the jurisdictional limits of small claims are exempt from the mediation and arbitration provision. Meaning the parties do not have to participate in mediation or arbitration. Further, the current statutory limit on small claims if $10,000 for an individual, meaning that the vast majority of the escrow deposits, which are less than $10,000, would be subject to the jurisdiction of small claims and this forum provides a seller an expedient and low cost means of seeking the recovery of the escrow deposit. Unfortunately, most buyer’s are not going to just hand over their escrow deposit and in the event, a buyer does breach the seller should seek competent legal counsel to discuss their options for seeking recovery.

Additionally, when a buyer breaches the RPA and the contract is canceled but the escrow deposit is left in limbo that can have the effect of putting a future property in jeopardy. If the contract is properly canceled but there is a dispute over the escrow deposit, the parties on the cancellation should agree to the cancellation with an instruction that escrow is to hold the deposit until such time as the court has determined whom the distribution should be made too or the parties agree on a distribution. If the parties cannot agree to the cancellation and one party will not execute the cancellation, this leaves the escrow technically open. In this situation, the seller should seek immediate legal assistance to help resolve this matter. The reality is even though there was a proper cancellation and the contract may no longer be effective, the escrow holder will not engage in another transaction with the open but defunct escrow. This type of situation can cost a seller significant amounts of money.

While we have looked at the impacts of a buyer’s breach, what happens if the seller breaches. In a market like we are seeing right now, where there are a low supply and a high demand, resulting in climbing home prices, it is not uncommon for sellers wanting to capitalize on the rising market and breach an agreement to seek a more lucrative deal elsewhere. It is an unfortunate scenario for all, but we see this a lot.

In this situation, it is important for a buyer to seek competent counsel. The law creates a remedy of specific performance. This remedy allows the buyer to force the seller to perform on the contract. Generally, the law favors providing compensation to aggrieved parties. However, the law has determined that property is so unique that the only suitable remedy is to force the seller to perform on the contract as there is no adequate remedy. This is codified in California Civil Code Section 3387 wherein the law creates a presumption that pecuniary compensation is not an adequate remedy and the statute goes on to say that when the property is going to be used as the buyer’s primary residence, the presumption that pecuniary compensation is not adequate is conclusive, meaning that the seller cannot overcome the argument related to the adequacy of the remedy. This sets a dangerous precedent for breaching sellers.

The law states that even if a seller breaches they cannot solve that breach by paying money to the buyer. For a more in-depth review of specific review see our previous article on specific performance. One question that comes up often from aggrieved buyers is what certainty is there to obtain specific performance when a seller will just sell the property to somebody else. The law allows the buyer to place a lis pendens on the property to put the world on notice that there is another that has filed an action related to a claim on the property. This will effectively prevent another escrow from closing as the lis pendens acts as a cloud on title.

Buyers and Sellers need to be aware of the consequences related to a breach of the agreement as the penalties can be severe. Further, the parties need to remember that there is a prevailing party attorney’s fees that will shift liability for attorney’s fees to the losing party. If a party to an RPA finds themselves involved in a breach situation they should seek counsel.

In the next article in this series, we will look at the process to close escrow. An important issue that can have terrible unintended consequences if the proper procedure is not followed and a party then seeks to cancel. Stay tuned for the next installment in this series.