Can Buyer Back Out of Purchase Contract for Seller’s Breach?

Question:  When we purchased our Chandler home, we received the Seller’s Property Disclosure Statement (“SPDS”). The SPDS did not disclose any prior flood damage or mold. During our 10-day inspection period, our home inspector that did not find any prior flood damage or mold. After the 10-day inspection period had expired, however, we learned from a casual conversation with a neighbor that both the seller’s home and the neighbor’s home had flood damage and mold remediation two years earlier. We now want to cancel the purchase contract and get a refund of our $10,000 earnest money. Can we get our $10,000 earnest money back even after our 10-day inspection period has expired?

Answer: Probably. Under the standard purchase contract the seller has an obligation to disclose all material defects regarding the property, whether or not a buyer’s 10-day inspection period has expired. Flood damage and mold remediation two years earlier is a material defect in a home. Therefore, you are probably entitled to the return of your $10,000 earnest money because the seller breached the purchase contract.

Note: If the seller becomes aware of a material defect after the 10-day inspection period has passed, the purchase contract requires the seller to amend the SPDS to disclose this material defect. The buyer then has five days to cancel the purchase contract. For example, if a few days before close of escrow the seller’s roof leaks after a monsoon, the seller is required to deliver an amended SPDS to the buyer disclosing the leaking roof. The buyer then has five days to cancel the purchase contract.