Last updated: October 2026
Most California real estate contract disputes come down to a contingency: whether it was satisfied, whether it was waived, or whether it expired before anyone noticed. The second most common is the deposit — who keeps it when a deal collapses. California limits what a seller may retain from a residential buyer’s deposit, and the limit surprises both sides. Bay Legal, P.C. advises buyers, sellers, and investors on real estate contract disputes, from the demand letter through mediation, arbitration, or trial.
Definition: A real estate contract dispute is a disagreement over the terms, performance, or termination of a binding agreement to buy, sell, or lease property.
What causes most contract disputes?
- Contingencies. Financing, inspection, and appraisal contingencies protect a buyer, and they operate on deadlines. Most disputes in this category are about whether a contingency was removed in time or at all.
- Failure to close. A buyer who cannot fund, or a seller who will not convey, after the contingency period has passed.
- Title problems. Liens, easements, or boundary discrepancies that surface in the preliminary report and were not resolved before closing.
- Repair obligations. Agreed repairs not completed, completed poorly, or completed without permits.
- Ambiguous drafting. Terms that seemed clear at signature and read two ways once money is at stake. Ambiguity is generally construed against the party who drafted the clause.
- Misrepresentation. False statements about the property or the transaction, which overlap with the disclosure branch and are addressed there.
Who keeps the deposit when a deal falls apart?
The question buyers and sellers most often get wrong, and California answers it more specifically than most states.
A liquidated damages clause in a residential purchase agreement is governed by Civil Code section 1675. Where the property is a dwelling of not more than four units and the buyer intends to occupy it, an amount up to 3% of the purchase price is presumed valid as liquidated damages. Anything above 3% is presumed invalid, and the seller must prove the amount was reasonable.
Two conditions attach. The clause must be separately signed or initialled by both parties to be effective, and the presumption runs the other way for non-residential and investment transactions, where ordinary liquidated damages principles apply instead.
So a seller holding a 5% deposit on a $1.2 million home after a buyer walks is not automatically entitled to keep it. They may retain up to 3% under the presumption and must justify the rest — which is frequently the whole of the negotiation when a deal collapses late.
What remedies are available?
Specific performance matters more here than in most contract disputes. Because each parcel of real property is treated as unique, damages are frequently inadequate, and Civil Code section 3384 allows a court to order the contract performed. A buyer who wanted that particular property, and a seller facing a buyer who will not close, both have this available in a way they would not on an ordinary commercial contract.
- Damages for the loss caused by the breach, under Civil Code section 3300, limited by section 3301 to amounts clearly ascertainable.
- Liquidated damages where the clause is valid under section 1675.
- Rescission under Civil Code section 1689 where consent was obtained by fraud, mistake, or material misrepresentation.
- Attorney fees only where the contract provides. The C.A.R. Residential Purchase Agreement contains a fee-shifting provision, and whether mediation was attempted first can determine whether fees are recoverable at all.
Fraud claims carry their own measure. Where the dispute involves misrepresentation about the property rather than breach of a term, damages are measured under Civil Code section 3343 rather than section 3300 — the disclosure branch covers that analysis.
How long do you have?
| Claim | Period | Runs from | Authority |
|---|---|---|---|
| Breach of a written purchase agreement | 4 years | The breach | Code Civ. Proc. § 337 |
| Breach of an oral agreement | 2 years | The breach | Code Civ. Proc. § 339 |
| Fraud or misrepresentation | 3 years | Discovery of the facts | Code Civ. Proc. § 338(d) |
| Claims with no other stated period | 4 years | Accrual | Code Civ. Proc. § 343 |
Full text: § 337 · § 338 · § 339 · § 343. A contract may specify a shorter period than the statute allows, within limits, so the agreement is worth checking before assuming four years.
What should you do at each stage?
Before a dispute
- Have the contract reviewed before signature, when terms are still negotiable. Almost everything in a purchase agreement is negotiable beforehand and fixed afterwards.
- Diarise every contingency deadline and every removal date. Contingency periods run whether or not anyone is watching them.
- Put financial terms beyond argument — price, deposit, payment deadlines, escrow handling, and what happens on non-performance.
- Keep the paper. Contracts, addenda, disclosures, inspection reports, and every email and text about the transaction. These cases are decided on documents.
When a dispute arises
- Read the dispute resolution clause first. Most California residential agreements require mediation before filing, and skipping it can cost you attorney fees even if you win.
- Check the deadline. Before negotiating, not after. Months of good-faith discussion have ended more claims than any defence.
- Communicate in writing. A verbal understanding reached during a dispute is the next dispute.
- Do not stop performing without advice. Whether a breach is material enough to excuse your own performance is a legal judgment, and getting it wrong makes you the breaching party.
After resolution
- Document the settlement properly, including releases, and record anything affecting title.
- Confirm escrow instructions match the settlement before funds move.
- Keep the file. Disputes about what a settlement covered are more common than they should be.
Do you have to mediate first?
Usually. The C.A.R. Residential Purchase Agreement requires the parties to attempt mediation before pursuing court or arbitration, and the consequence of skipping it is specific: a party who files without mediating can lose the right to recover attorney fees even if they prevail.
Where mediation fails, the claim proceeds to arbitration or to the Superior Court of the county where the property is located, depending on what the agreement provides. Note that arbitration provisions in the C.A.R. form require separate initialling, so a buyer or seller who did not initial that paragraph may be heading to court rather than arbitration. The California Courts publish local rules, which differ by county.
Who handles contract disputes at Bay Legal?
Lead litigation attorney Evan Livingstone heads the firm’s litigation group, including real estate disputes. Robert Brian Ponziano handles real estate transactions and civil litigation and holds a California real estate licence alongside his law licence. Clarence Olson practises in real estate law, and managing attorney Jayson R. Elliott advises on transaction structure.
Bay Legal, P.C. serves clients statewide from offices in Palo Alto and Los Angeles. Complaints about agent or broker conduct can separately be made to the Department of Real Estate.
Frequently Asked Questions
Can the seller keep my deposit if I back out?
Not necessarily all of it. Under Civil Code section 1675, in a residential purchase of four units or fewer where the buyer intends to occupy, liquidated damages up to 3% of the purchase price are presumed valid. Anything above 3% is presumed invalid and the seller must prove it was reasonable. The clause must also be separately initialled.
What happens if a contingency deadline passes?
The protection generally lapses. A buyer who does not remove or exercise a contingency in time may be treated as having waived it, which can expose the deposit if they later withdraw. Contingency periods run whether or not anyone is tracking them, which is why they should be diarised at signature.
Can I force the other side to complete the sale?
Often, through specific performance. Because each parcel of real property is treated as unique, damages are frequently inadequate, and Civil Code section 3384 allows a court to order the contract performed. This remedy is far more available in real estate than in ordinary commercial contract disputes.
How long do I have to sue over a real estate contract?
Four years for breach of a written agreement under Code of Civil Procedure section 337, two years for an oral one under section 339, and three years from discovery for fraud under section 338(d). A contract may specify a shorter period within limits, so read the agreement before assuming you have four years.
Do I have to mediate before filing?
Usually yes. The C.A.R. Residential Purchase Agreement requires it, and filing without attempting mediation can cost you the right to recover attorney fees even if you win. Check the dispute resolution clause first — the arbitration paragraph requires separate initialling, so not everyone who signed the form agreed to arbitrate.
Can I stop performing if the other side breaches?
Only if the breach is material. Stopping over a minor breach makes you the breaching party and reverses the dispute. Materiality turns on how far you were deprived of the benefit you bargained for and whether money can compensate you — a judgment worth taking advice on before acting.
Related Questions
What is a contingency removal?
A written notice removing a protection from the contract, usually financing, inspection, or appraisal. Once removed, backing out for that reason generally puts the deposit at risk.
What is an addendum, and does it override the contract?
A written amendment to agreed terms. A properly executed addendum controls over the original wording it changes, which is why loose email agreements about revised terms cause so much trouble.
Who holds the deposit during escrow?
The escrow holder, as a neutral third party. They will not release disputed funds without instructions from both sides or a court order, which is often what forces a dispute to a head.
Is a real estate contract binding before escrow closes?
Yes. A signed purchase agreement is binding from acceptance, subject to its contingencies. The common belief that nothing is fixed until closing is wrong and expensive.
Explore contract dispute topics
- Common types of contract disputes — the disputes that arise most often
- Remedies for common types of violations — what can be recovered
- Disclosure disputes — the seller’s disclosure obligations
- California real estate disputes — the wider practice
Talk to a California real estate contract attorney
Contingency deadlines run on their own, the deposit rule is narrower than most people expect, and your agreement probably requires mediation before you can file. To discuss a contract dispute, call the office nearest you or email intake.
Bay Legal, P.C. — serving California statewide
Northern California office
667 Lytton Ave Ste 3, Palo Alto, CA 94301
(650) 668-8000
Southern California office
3211 Cahuenga Blvd W Ste 212, Los Angeles, CA 90068
(213) 668-8000
Intake: intake@baylegal.com
Fax: (650) 963-0041
Website: https://baylegal.com
This page is general information about California law and does not constitute legal advice or create an attorney-client relationship. For advice on your specific situation, contact a licensed California attorney.