Under what circumstances may a real estate contract be canceled?

By Barbara Craig, Real Estate Attorney

Sometimes it becomes necessary for the buyer or seller to cancel a real estate contract. Depending on the stage of negotiations, this can be a mildly difficult task, or a more serious matter which triggers significant penalties for the party cancelling.

For a real estate contract to be valid it must be in writing, signed by the buyer and seller, and clearly identify the real property. If there isn’t a written and signed contract, there is no deal. Even after the negotiations are complete and the contract is signed, there are times that a buyer or seller may need to cancel the real estate contract.

Reasons for canceling a real estate contract

cancel real estate contract palos verdes real estate attorneyThere are a variety of circumstances under which a real estate contract may be canceled. Most have to do with the contingency clauses that are written into real estate contracts. Contingencies are part of a contract that indicate certain terms that must be met before the contract will be completed. Typical contingencies in a real estate contract are:

  • Time to review condo or HOA documents
  • Required inspections completed with a satisfactory report
  • An appraisal to provide to the lender
  • Loan approval for financing the purchase
  • Review of property disclosures
  • Title survey / report
  • Mandated local city or county reports

If any of these contingencies are not met or otherwise resolved in a timely manner, the contract will be canceled. A buyer can cancel the purchase for the inability to meet a contingent term and will normally receive their all of their earnest money deposit back. A seller can cancel the contract when the buyer fails to perform their obligations under the terms of the contract.

Some buyers may try to cancel a purchase even though the contingencies have been met by arguing about the validity of this or that detail. In most cases, disagreements can be settled by the respective client’s agents and attorney(s).

Consequences of canceling a real estate contract

If a contract is canceled without good cause, the party canceling is in breach of contract. A buyer who backs out without good cause will usually lose their earnest money deposit, and in extreme cases, may be subject to legal action for breach of contract by the spurned seller. In some situations, the buyer may be protected by a clause which limits damages in the event of a canceled contract to the amount of the earnest money or some other predetermined figure.

A seller who backs out without good cause can also be sued, particularly if it appears the seller received a better offer after signing the contract and canceled the sale in order to sell the property at a higher price. A buyer can pursue legal action against the seller for specific performance and damages for expenses incurred during the real estate transaction.

Do you have questions about canceling a real estate contract, or need expert legal advice to protect your real estate and financial interests? Contact Palos Verdes Real Estate Attorney Barbara Craig to schedule a free consultation. Serving clients in the South Bay area including San Pedro, Rancho Palos Verdes, Lomita, Harbor City, Torrance, Wilmington, Long Beach, and other nearby communities.