Generally Buyers Cannot Cancel After Expiration of Inspection Period

A California partnership signed a contract to sell forty acres of land in the Rio Verde area of North Scottsdale. The buyer deposited $100,000 earnest money and under the contract had a sixty-day inspection period to conduct all “due diligence” inspections, including environmental inspections, relating to the forty acres of land. The sixty-day inspection period passed, and escrow was scheduled to close. The buyer’s environmental expert now says that the southern portion of the forty acres has environmental problems because of hazardous wastes due to dumping of paint and other building materials by homebuilders in the area. The buyer now demands that the cancellation of the contract and that the $100,000 earnest money be returned. The California partnership refuses to agree to the return of the $100,000 earnest money to the buyer because it is their understanding is a buyer is not entitled to cancel a contract because of environmental problems after the inspection period has passed. They had no knowledge of any environmental problems, and no one in the California partnership group other than one person had even seen the land for several years. Per real estate law, is the California partnership we entitled to the $100,000 earnest money if the buyer won’t close the transaction?

Probably. The general rule is that, if there is an inspection period for a buyer to conduct “due diligence” to determine the feasibility of buying the property, including the existence of any environmental problems, the buyer cannot cancel the contract after the inspection period has passed. Therefore, the California partnership should be entitled to the $100,000 earnest money. However, some courts have ruled that, if there is a mutual mistake of fact between the seller and the buyer relating to a material problem with the property, i.e., neither the seller nor the buyer knew of the material problem, the buyer is entitled to rescind the transaction based on this mutual mistake of fact and receive the return of the earnest money. For example, the Ohio Supreme Court has ruled that, even though the buyer did not discover a flood plain problem until after the inspection period, the buyer was entitled to rescind the transaction and get the earnest money back because both the seller and the buyer were under a mutual mistake of fact regarding the existence of this flood plain problem. 632 N.E.2d 507 (1994).

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