California Condo Buyers Who Decide Not to Close On Their Units Are Usually Entitled to a Partial Refund of Their Condo Deposit. A Smart Investor Who Wants to Cancel His Condo Contract Should Hire a Lawyer to Protect His Rights, Guide Him Through the Process, and Secure a Favorable Settlement
There was a flurry of litigation between condo buyers and sellers in 2007, and there will much more in 2008. My fellow condo contract lawyer Jared Beck covered many such suits filed in Florida over on his blog.
Most of the litigation boils down to three types of disputes: the developer not opening the building on time, the developer not building the same building that it promised to buyers, and the developer illegally keeping an excessive amount of the deposits in collecting from potential buyers.
The focus of this post is on this last type. Increasingly people who have put down large deposits on pre-construction condominium units are deciding they do not want to close. These defaulting purchasers are in most cases entitled to some of their deposit back, but frequently the developer refuses to follow the law.
Developers have obvious reasons for not following the terms of their own contracts as well as state and federal law, all of which usually require a partial refund of a buyer’s deposit if the buyer decides not to close. First, most buyers don’t know their rights, and won’t even try to get the refund they are entitled to.
Second, the developers themselves may not even realize that state and federal law usually require them to give partial refunds of deposits to buyers.
Third, even if the developers do know that they are supposed to give partial deposit refunds, they often simply make the business decision to refuse to follow the law until the buyer forces them by filing a lawsuit. If only 20% of buyers sue, then the developer has to give 20% of its canceling condo buyers refunds, but keeps the full deposits on the other 80%.
Even when buyers do know their rights and demand a partial refund, sometimes the developer simply ignores their letters and phone calls demanding the partial refund. Every major developer has its own army of lawyers, and until the buyer hires his or her own lawyer, the developer can usually get away with ignoring letters from buyers threatening to sue. The developers know from experience that when a buyer threatens to sue but hasn’t hired a lawyer, it is usually an empty and idle threat that will never be followed up on.
California Condo Contract Cancellation Law
People who purchase condos in California usually put 10% to 20% of the purchase price down as a deposit. However, if they decide not to close, in most circumstances they are entitled to get all but 3% of the purchase price back under California’s laws protecting buyers of new condo units. So someone who puts down a $90,000 deposit (15%) on a $600,000 condo and then decides not to close is probably entitled to get $72,000 of his $90,000 deposit back, while only losing $18,000 (3%) to the developer.
The buyer must be careful, however, that he properly gives notice that he does not intend to close. Usually the buyer should inform the seller and the escrow company as soon as possible of his intention not to close, and make a properly formatted demand for most of his deposit back.
At this point the clock starts ticking for the developer. If the developer follows the proper procedure and proves the buyer’s default is more than 3% it might be able to keep more than the standard 3%, but the developer must first send the defaulting buyer certain financial documents showing why it is entitled to more than 3%. The deadline for the developer to do this is fairly tight.
A smart buyer with a good lawyer will then review these documents if the developer does try to keep more of the deposit, challenge the documents if necessary, and then file a response disputing the developer’s calculations if their are any flaws or questionable assumptions. The buyer’s lawyer will also demand through the litigation discovery process the developer’s internal financial data to dispute/verify the developer’s information, as well as file subpoenas demanding employees of the developer submit to depositions.
The best case for a buyer is if the developer does not file any documents on time, and then right after the deadlines expire file suit against the developer for the deposit refund. You’d surprised at how often a developer will fail to properly respond to a buyer’s demand for a partial refund out of sheer negligence. But again, if you are going to be able to take advantage of the developer’s mistakes, you will need a lawyer who is able to recognize and jump all over them. Being represented by counsel also allows you to negotiate a settlement with the developer from a position of strength, sometimes before even filing suit, getting you most of the deposit refund you’re entitled to sometimes in a matter of weeks.
Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or firstname.lastname@example.org. Comments about the blog via e-mail are welcomed.