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The buyer has removed all his contingencies and so he doesn't have any way to back out without losing his earnest deposit money. Unfortunately, I later found out that there are some defects such as a leaking roof and the A/C is no longer working. It's not that I failed to disclose these but that they occurred after he removed his contingencies. Is he still able to cancel when I disclose these additional defects? Can we both mutually agree to cancel the purchase contract and I grant him his deposit money back? If so, can the broker/agent come after me for their commission?

Country: USA
State: CA
Property type: Residential property

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  • The laws that control such things vary by country, often widely. In the US, they vary by state, and in other federal countries like India or Canada they vary by province or state. So any answer will require knowing what jurisdiction this is in.. Also the laws will vary by kind of property. This sounds like residential real estate, but might be a commercial building or something else. That may well matter. Please edit the question to add details. Feb 13 at 19:08
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    Voting to close because this clearly depends on all sorts of highly fact- and jurisdiction-specific issues, and this is obviously going to put a lot of money at stake because it's a real estate issue. The only correct answer is "You should consult your attorney, or hire one if you don't already have an attorney."
    – Kevin
    Feb 14 at 23:30
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    Generally, all parties to a contract can mutually agree to cancel it.
    – Ryan M
    Feb 14 at 23:41
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    There are no enough details in the question to give a reasonable answer. It should not be closed on grounds of lack of details, in my view. Nor should it be considered a request for specific legal advice, it is asking what the law permits or requires, not what the poster or anyone else should do. Feb 15 at 14:29
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Sources

California code DIVISION 2, Part 4, Title 4, Chapter 2, Article 1.5 section 1102.3 provides:

The seller of any single-family real property subject to this article shall deliver to the prospective buyer the completed written statement required by this article, as follows:

(a) In the case of a sale, as soon as practicable before transfer of title.

...

If any disclosure, or any material amendment of any disclosure, required to be made by this article, is delivered after the execution of an offer to purchase, the prospective buyer shall have three days after delivery in person, five days after delivery by deposit in the mail, or five days after delivery of an electronic record in transactions where the parties have agreed to conduct the transaction by electronic means, pursuant to provisions of the Uniform Electronic Transactions Act (Title 2.5 (commencing with Section 1633.1) of Part 2 of Division 3), to terminate the offer by delivery of a written notice of termination to the seller or the seller’s agent. The period of time the prospective buyer has in which to terminate the offer commences when Sections I and II, and, if the seller is represented by an agent in the transaction, then also Section III, in the form described in Section 1102.6, are completed and delivered to the buyer or buyer’s agent. A real estate agent may complete their own portion of the required disclosure by providing all of the information on the agent’s inspection disclosure set forth in Section 1102.6.

Section 1102.7 Provides:

Each disclosure required by this article and each act which may be performed in making the disclosure, shall be made in good faith. For purposes of this article, “good faith” means honesty in fact in the conduct of the transaction.

Section 1102.8 provides:

The specification of items for disclosure in this article does not limit or abridge any obligation for disclosure created by any other provision of law or which may exist in order to avoid fraud, misrepresentation, or deceit in the transfer transaction.

Section 1102.9 provides:

Any disclosure made pursuant to this article may be amended in writing by the seller or his or her agent, but the amendment shall be subject to Section 1102.3 or 1102.3a.

Nolo's Page "Selling a California Home: What Are My Disclosure Obligations?" says:

A California property seller needs to provide these disclosures to a prospective buyer "as soon as practicable before transfer of title." That's a bit vague, but the intent is to get the disclosures to the buyer in a timely fashion. As a practical matter, this usually happens early in the purchase process. ... if you don’t provide a prospective buyer with the disclosure statement at all, the buyer has a right to cancel the sale agreement up to the last moment of negotiations.... What if you are unsure whether you need to disclose a defect? As a rule, the more you disclose, the better it is for both you and the buyer.

Wolff Law Office's page on "California Law on Disclosure Duties in Real Estate Sales, and Liability" says:

The common law has for decades imposed duties on sellers of real estate, particularly residential real estate such as homes, condominiums, etc., to disclose to the buyer “any material facts known to the seller affecting the value or desirability of the real estate" being sold. ... The form Transfer Disclosure Statement (“TDS”) disclosure shall be filled out and made in "good faith," which is expressly defined to mean "honesty in fact in the conduct of the transaction." Civ. Code § 1102.7

In California, the seller of a residence has both a common law and statutory duty of disclosure to the buyer, and even full compliance with the statutory duty does not excuse the common law duty. 1 Miller & Starr, California Real Estate (3d ed. 2005) § 1:140.

Under the Common Law, "where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer." Lingsch v. Savage, supra, 213 Cal. App. 2d at 735.

"A breach of this duty of disclosure will give rise to a cause of action for both rescission and damages. [Citation.]”'. Shapiro v. Sutherland, supra, 64 Cal.App.4th at p.1544; Karoutas v. HomeFed Bank (1991) 232 Cal. App. 3d 767, 771.

...

Neither an "as is" sale nor the buyer's independent inspection exonerates a seller or the seller's agent from fraudulent misrepresentations concerning known defects not otherwise visible or observable to the buyer. Loughrin v. Superior Court (1993) 15 Cal.App.4th 1188, 1195; Shapiro v. Hu (1986) 188 Cal. App. 3d 324, 333-334, 233 Cal. Rptr. 470; Lingsch v. Savage (1963) 213 Cal. App. 2d 729,740-742,29 Cal. Rptr. 201; Greenwald & Asimow, Cal. Practice Guide: Real Property Transactions (The Rutter Group 2005) § 4:3 52, p. 4-86.10; 1 Miller & Starr, California Real Estate supra, §1:154.

Conclusion

If the seller becomes aware of any materiel defect after a contract has been signed or after an offer has been accepted, including because the defect has just occurred, the seller is still obliged to inform the buyer as specified in section 1102.3, sec. 1102.7, and under the common law. This may be an amendment of a previous disclosure. Such notification will trigger a period of three or five days during which the buyer will have the right to cancel the contract. This is true no matter what contingencies are provided in the contract.

If the seller fails to make such notification in good faith, the buyer may have the ability to sue for damages after the sale.

Whether an would still be entitled to a commission on such a failed sale depends on the wording of the seller's contract with the agent or broker.

Whether a particular issue is a "materiel defect" depends on the specific facts.

As long as title has not yet passed, both parties can always agree to cancel such a contract.

A seller would be wise to consult a lawyer or other expert over any question about what needs to be disclosed or what rights the buyer would then have.

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"Is he still able to cancel when I disclose these additional defects?"

Yes, especially if the other party to the contract (i.e. you) also desire to cancel it. Also, a major piece of new evidence arose that neither party knew before entering the contract.

"Can we both mutually agree to cancel the purchase contract and I grant him his deposit money back?"

RyanM's comment: is correct, that all parties can mutually agree to cancel the contract. If you want to be extra careful, you can both sign a new contract agreeing not to hold the other to the previous contract.

"If so, can the broker/agent come after me for their commission?"

It would depend on your contract with the agent. Does it say "the agent will get 5% commission if a buyer makes a deposit", or does it say "the agent will get 5% commission if a buyer's purchase is closed" ? Without seeing your specific contract with the agent, we can't be 100% sure, but it would be unusual for a real estate agent to get a commission for a sale that did not go through, and making a deposit is not the same as closing a sale.

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