You do the final walk-through a few days before closing and the property is not the property you contracted for. The tenant you were told about is gone and someone new is living there on a lease you have never seen. The rent is lower than the number on the listing. Or the change is physical — a tree is down, the appliances are missing, there is fresh water damage, or someone has been doing “repairs” that nobody mentioned.
Then the seller says the thing sellers say: close on time or you are in breach, and we keep the deposit.
Two separate questions are buried in that moment. Can you cancel? And if you do, who gets the money in escrow? California law answers both more favorably for the buyer than most sellers — and many agents — assume. But the answers depend on doing things in the right order, in writing, while escrow is still open. Here is how it works.
The contract promises you the property as it was when you agreed to buy it
The California Association of Realtors Residential Purchase Agreement (paragraph 7B in the current 6/26 revision) delivers the property “As-Is” in its physical condition as of the date of acceptance — not as of whatever it looks like on closing day — and requires that it be maintained in substantially the same condition from acceptance through closing. The final walk-through paragraph (16), labelled a Final Verification of Condition, exists precisely so the buyer can confirm the seller has done that, completed any agreed repairs, and “complied with Seller’s other obligations under this Agreement.”
Sellers and their agents like to point out that the form says the walk-through is “not a contingency.” That is true, and it is beside the point. It means you cannot cancel because you have changed your mind about the paint color. It does not mean the seller is free to hand you a different property than the one you contracted for. The seller’s maintenance obligation is a term of the contract, and a material change to the property is the seller’s breach, not your cold feet.
When the change is the tenant
On an income property, the leases are part of what you are buying. The rent roll is the reason you paid the price you paid. The standard forms reflect that:
- The purchase agreement requires the seller to deliver copies of the existing leases and rental agreements, and typically tenant estoppel certificates, within a set number of days after acceptance, so the buyer can verify who is in the units, on what terms, and what has been paid.
- The C.A.R. Residential Income Property Purchase Agreement and Commercial Property Purchase Agreement contain a “Changes During Escrow” clause (paragraph 13), and the Tenant Occupied Property Addendum used with the residential form carries the same mechanism: before renting a vacant unit, changing an existing lease, or otherwise changing the condition of the property, the seller must give the buyer at least 7 days’ written notice, and the buyer may object in writing within 5 days, in which case the seller may not make the change. A seller who installs a new tenant with no notice at all has breached the clause; so has a seller who proceeds over a timely objection.
- The purchase agreement also obligates the seller who becomes aware, before closing, of “any material inaccuracy in disclosures, information or representations previously provided” to promptly deliver an amended disclosure in writing; on property of one to four units, California Civil Code § 1102.9 imposes the same duty by statute. A seller who told you the unit was leased at $3,200 to a tenant with a deposit on file, and who then installs a friend at $2,400 with no deposit, is sitting on a disclosure that has become false.
There is also a fraud dimension. If the rent figure on the listing or in the seller’s disclosures was a knowing overstatement — or became one and the seller stayed quiet — that is a misrepresentation under Civil Code §§ 1572 and 1710, and the remedies for fraud are broader than the remedies for breach of contract. The same is true if the “tenant” is really a handyman working off repairs the seller never disclosed were needed. Undisclosed repairs are an undisclosed defect, and a seller does not get to launder them through a free-rent arrangement.
Can you cancel? Three routes, and they are not the same
1. Treat the seller’s breach as excusing your performance
A buyer is not in default for refusing to close while the seller is in uncured material breach. But you have to make the record. The purchase agreement has a mechanism for it: a written Notice to Seller to Perform (C.A.R. Form NSP), which identifies the seller obligation that has not been performed and gives the seller at least two days to cure. If the seller does not cure — does not restore the property, does not unwind the improper lease, does not deliver what was promised — paragraph 14D(2) of the form permits the buyer to cancel, and the seller is then obligated to sign the instructions releasing the deposit.
What you must not do is simply fail to show up at closing. Silence is how a buyer with an excellent breach argument turns into the defaulting party on paper. The seller sends a Demand to Close Escrow, you do not close, and now the file reads as your default. Put the seller’s breach in writing first, before any closing deadline passes.
2. Rescind for fraud or failure of consideration
Civil Code § 1689 allows a party to rescind a contract when consent was obtained by fraud or mistake, or when the consideration fails in a material respect through the fault of the other party. Rescission unwinds the deal: the deposit comes back, and under § 1692 the rescinding party may also recover consequential damages — inspection and appraisal fees, loan costs, rate-lock losses, the money you spent because you believed the property was what you were told.
Rescission is the sharper tool where the misrepresentation is about the fundamentals of what you bought — the rent, the tenancy, the condition — rather than about a repair the seller can still complete. It must be exercised promptly once you discover the grounds, and it must be communicated in writing.
3. Close anyway, and sue for the difference
Sometimes the property is still worth having. In a rising market, or where the change is fixable, the right move can be to close under a written reservation of rights and pursue the seller afterward for the damages the change caused: the difference in value, the cost of restoring the property, the lost rent. For fraud, Civil Code § 3343 governs what a defrauded buyer of property can recover. For breach of contract, ordinary contract damages apply.
This is a real strategic choice, not a fallback. A buyer who walks from a property that has gone up in value since acceptance is handing the seller exactly what a seller who wanted out was hoping for. Sometimes the strongest response to a seller trying to sabotage the deal is to close it.
The deposit: why the liquidated damages clause may not reach it
The seller’s claim to the deposit runs through the liquidated damages clause. That clause only applies if the buyer defaults. If your refusal to close was justified by the seller’s uncured material breach, there is no buyer default, and the clause does no work at all.
Even where the seller can argue default, two points deserve attention:
- The 3% presumption is narrower than people think. Civil Code § 1675’s rule that liquidated damages up to 3% of the price are presumed valid applies to residential property of four units or fewer that the buyer intends to occupy. An investor buying a duplex is not covered by it. That contract falls under the general rule in § 1671(b): the clause is enforceable unless it was unreasonable under the circumstances when the contract was made — a different analysis, and one where the seller does not get the benefit of the presumption.
- The clause had to be separately initialled by both parties under § 1677. Check. And note that the C.A.R. commercial form’s liquidated damages paragraph contains no 3% language at all — it simply retains “the deposit actually paid,” which is exactly why the § 1671(b) reasonableness analysis matters on an investment purchase.
And regardless of who is right, escrow will not release the deposit without both signatures. That is where the written demand under Civil Code § 1057.3 comes in. On residential property of one to four units, once you make a written demand for release, the seller has 30 days to sign the release instructions or face liability for the funds, statutory treble damages, and your attorney’s fees, unless the seller was withholding the money over a genuine good-faith dispute. The mechanics are covered in How to Get Your Earnest Money Deposit Back in California.
What the seller will say, and what it is worth
“You bought it as-is.” As-is in the California form means as it was on the date of acceptance, with the seller’s disclosure obligations intact. It has never meant “as-is on closing day, whatever I have done to it since.”
“You removed your contingencies.” Contingency removal waives your right to cancel over things you could have investigated during the contingency period. It does not waive the seller’s later performance, and it does not waive fraud. Nobody can inspect their way past a change the seller made after the inspection.
“The new tenant is fine. Take a rent credit.” Perhaps. But a one-year lease with someone who has paid no deposit and is not paying rent is not a rent credit problem — it is a tenancy you will have to live with or pay to end, in a state where that is neither fast nor cheap. Do not accept a number at the closing table without understanding what you would be inheriting.
“Sign the cancellation and we will discuss the deposit.” Read the form. The C.A.R. Cancellation of Contract form has a full-release option that releases each side from “all other claims, actions and demands” arising from the agreement — signing that box can extinguish the claims you would need to get the deposit back. The same form has a partial-release option that cancels the sale, reserves all rights, and leaves the deposit in escrow. If you sign anything, sign that one.
Why the seller may have done it on purpose
Prices moved. The seller has a better offer, or thinks they would. A seller who cannot cancel without consequences has an incentive to make the buyer cancel instead — and to keep the deposit on the way out. Changing the tenancy, letting the property deteriorate, or making closing unpleasant enough that the buyer walks are all versions of the same play.
That matters legally as well as practically. A seller who engineers the buyer’s exit is in breach of the implied covenant of good faith and fair dealing that runs through every California contract, and a fact pattern that shows intent is what turns a contract case into a fraud case, with the wider damages that come with it. Document what changed, when, and who benefits.
What to do this week — while escrow is still open
- Photograph and record everything at the walk-through, and compare it against the listing, the disclosures, and your inspection report. Note the date.
- Get the new lease, the rent ledger, and the deposit accounting from the seller in writing. If the seller will not produce them, that refusal is itself evidence.
- Serve a written Notice to Seller to Perform identifying the breach and demanding cure, before any closing date or Demand to Close passes.
- Decide, with counsel, between cancellation, rescission and closing under reservation. They lead to different remedies and cannot always be combined later.
- Make the written § 1057.3 demand for the deposit if you cancel.
- Do not sign a cancellation or release until you know what it gives up, and do not sign a rent-credit addendum without knowing what the tenancy actually is.
Escrow timelines run in days. A buyer who spends two weeks arguing with the listing agent by text has usually lost the procedural high ground before a lawyer ever sees the file.
Mediation still comes first
The C.A.R. purchase agreement’s mediation clause applies to deposit disputes like any other. A party who files suit or demands arbitration without first attempting mediation generally forfeits the right to recover attorney’s fees, even if they win. Get the demand and the notice on the record, then mediate. Why mediation comes before you sue explains the clause.
How Jimmy can help
Jimmy Nguyen is a California real estate attorney and licensed broker in California and Nevada with more than twenty years inside the real estate industry. Mid-escrow disputes are won or lost on procedure — which notice goes out, in what order, before which deadline — and that is transaction knowledge as much as it is law.
He can review the purchase agreement and the walk-through evidence, serve the Notice to Perform and the § 1057.3 demand, advise on whether to cancel, rescind or close under reservation, represent you at mediation, and take the matter further if the seller will not release the funds.
This is part of Jimmy’s earnest money deposit dispute practice. Where the change reveals a defect the seller knew about, see seller nondisclosure and agent misconduct; where your own agent told you to just close, see suing your real estate agent. If the property is a commercial or multi-unit building bought on the income forms, the commercial due diligence guide covers estoppels and the rent roll.
Email jimmy@lawjn.com with a short description of what happened, or use the form below.