UAR Legal Hotline question of the week

Low appraisal and price negotiation
Question: Suppose you represent the seller as the listing agent. The seller’s property is currently under contract with Buyer #1. The day before the Appraisal Deadline referenced in Section 24(e) and Section 2.4 of the REPC, Buyer #1 sends an addendum to you requesting the purchase price be reduced $10,000. It turns out the appraised value is $10,000 less than the contract price. You quickly and objectively present that addendum to your seller who advises you that he does not want to accept it. Accordingly, your seller checks the rejection box, and you return the addendum to Buyer #1’s agent. A few days go by and a better cash offer is presented to you by Buyer #2, which would net the seller an additional $15,000, and the settlement deadline would be in one week. The seller wants to accept Buyer #2’s offer for obvious reasons. You advise the seller that because Buyer #1 presented you with an addendum one day before the Appraisal Deadline requesting that the price be reduced $10,000, the addendum re-opened the contract to negotiation. You argue that because the seller didn’t accept the addendum, the contract with Buyer #1 was automatically cancelled. You then advise the seller to accept Buyer #2’s higher and better offer. Are there any problems here? If so, what are they?

Answer: Yes. Your advice to the seller is problematic. A common misconception is that if a REPC has been fully executed by all parties and if an addendum is subsequently presented to either party (such as the price reduction addendum in the scenario above), the contract is open to renegotiation and that if the requested modification contained in such addendum is not accepted, the contract is terminated. This thinking is legally INCORRECT. Remember that once the contract is formed (i.e., signed and accepted by all parties), if an addendum is presented to either party afterward, the entire contract is NOT open to renegotiation. You already have a contract. What is, however, open to negotiation is the modification to the contract contained in the addendum. If the requested addendum is never agreed upon (i.e., signed and accepted by all parties), the parties still have a contract and must proceed according to the original terms of the REPC. In other words, if an addendum to a fully executed REPC is not accepted, it is as if that addendum never existed. Therefore, in the above scenario, the seller has just sold his property twice! Since the addendum presented by Buyer #1 was not accepted, and since the appraisal deadline lapsed, the second-to-last sentence in Section 2.4 of the REPC, which states “[a] failure to cancel as provided in this Section 2.4 shall be deemed a waiver of the Appraisal Condition by Buyer,” is still applicable and is triggered. Since Buyer #1 did not cancel the REPC in accordance with the terms of Section 2.4, Buyer #1 must proceed to closing. The problem here is that Buyer #2 also thinks he has a contract, and he does.

Note: There is nothing wrong with a buyer requesting that the contract price be reduced after an appraisal is conducted. Just remember that the seller is not obligated to agree to the reduction and that if the addendum is not agreed upon, the original terms of the REPC still control. The buyer would have to make sure that if he wanted to cancel the contract in the event the seller doesn’t agree to the price reduction addendum, he must do so in a timely fashion in accordance with Section 2.4 of the REPC.