Forrester on Real Estate Law : San Diego Real Estate Lawyer & Attorney : Kevin Forrester Law Firm : California, Carlsbad, La Jolla, Escondido

Sometimes buyers and sellers agree in real estate purchase and sale contracts that the buyer's deposit will be "nonrefundable."  Or a point may be reached in a transaction where the seller's interest in consummating the deal seems to exceed the buyer's interest in completing their "due diligence".  In order to persuade the seller that the buyer is committed to the deal, the parties may then agree that some or all of the buyer's deposit will be "passed through" to the seller or retained in escrow on a nonrefundable basis.

Certainly the greater the buyer's "investment" in the deal, as represented by their releasing their deposit to the seller before close of escrow, the greater the likelihood the buyer will actually close the deal?

Perhaps. 

But the recent decision by the California 4th District Court of Appeal in Kuish v. Smith (PDF) (February 3, 2010) ---- Cal.Rptr.3d ----, 2010 WL 373225 serves as a reminder of the fact that under California law nonrefundable deposits are not nonrefundable.

The Kuish and Smith Agreement:

In January of 2006, Bradford Kuish agreed to purchase William W. Smith, Jr. and Rhonda Lynn Smith's Laguna Beach residence for the sum of $14 million.  Their agreement consisted of an offer, nine counteroffers, and escrow instructions that required Mr. Kuish to make a total of $620,000 in nonrefundable deposits to escrow.  (The agreement was not an option contract and contained no liquidated damages provisions.)  Escrow was to close on September 15.  Mr. Kuish completed his deposits by April 21, and requested escrow cancellation on September 18.

The Smiths agreed to cancel escrow in October, sold their Laguna Beach property for $15 million to a backup buyer in November, refused to return Mr. Kuish's $620,000 nonrefundable deposit ($400,000 of which had already been "passed through" escrow to them in accordance with the parties' agreement), and litigation commenced.

The Kuish v. Smith Decision:

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The California Department of Real Estate initiated over 2000 investigations involving loan modification complaints last year, record numbers of real estate licensees either surrendered their licenses or had their licenses revoked, and the worst part is, most of the people who received "Desist and Refrain" orders from the DRE were not even licensed.

The California State Legislature has, since October of last year, prohibited anyone providing any loan modification services from charging any kind of advance fee, yet the loan modification scams continue.

Borrowers who are in danger of default or foreclosure as a consequence of the public or their own private economic downturn should very carefully evaluate their financial options before seeking out any fee-based or nonprofit loan modification help.

Loan modification step one is, do your own homework.  An excellent starting point for your investigation is the DRE's comprehensive Consumer Alert, Fraud Warnings for California Homeowners (PDF) republished in November of last year (after California outlawed advance fees) and its consumer tips for working directly with your lender on loan modification (PDF).   These publications are loaded with good information and links to other resources without charge.

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