Taking the End of Due Diligence Period Seriously

Dear Forms Guy: I am the broker-in-charge at my office. I have a few questions about the proper way for an agent to handle a number of issues that come up when the parties are trying to negotiate repairs near the end of the Due Diligence Period in the Offer to Purchase and Contract (form 2-T). Can I ask you my questions, please? Sincerely, Lulu

Dear Lulu: Of course. That’s one of my favorite subjects. Fire away!

Lulu: Okay, thanks. I encourage my agents to avoid last-minute repair negotiations whenever possible, but it is not uncommon for the parties to be engaged in negotiating repairs close to the end of the Due Diligence Period. There still seems to be some misunderstanding about what needs to take place if the parties haven’t completed their repair negotiations by the end of Due Diligence. For example, one of my agents recently said that so long as he gets the buyer’s repair request to the listing agent before 5 p.m. on the last day of the Due Diligence Period, the buyer will be able to get the earnest money deposit back if the seller doesn’t agree to the requested repairs. That’s not right, is it?

Forms Guy: No! This is addressed very clearly in the contract. In paragraph 4(c), the buyer is advised “…to make any repair/improvement requests in sufficient time to allow repair/ improvement negotiations to be concluded prior to the expiration of the Due Diligence Period.” The WARNING at the end of paragraph 4(f) explains why this is so: “Buyer’s failure to deliver a Termination Notice to Seller prior to the expiration of the Due Diligence Period shall constitute a waiver by Buyer of any right to terminate this Contract based on any matter relating to Buyer’s Due Diligence.” In other words, a buyer doesn’t have the right to terminate the contract after the Due Diligence Period ends if the buyer is unable to negotiate repairs with the seller. If the buyer does terminate for that reason, it would be considered a breach of contract, resulting in the earnest money deposit being paid to the seller according to paragraph 1(e).

Lulu: What should a buyer do if the Due Diligence Period is about to end and repair negotiations haven’t been concluded?

Forms Guy: The WARNING in paragraph 4(f) provides the following advice: “If Buyer is not satisfied with the results or progress of Buyer’s Due Diligence, Buyer should terminate this Contract, prior to the expiration of the Due Diligence Period, unless

Buyer can obtain a written extension from Seller. SELLER IS NOT OBLIGATED TO GRANT AN EXTENSION.”

Lulu: Okay, let’s say that repair negotiations are still in progress but it’s close to the 5 p.m. deadline. The listing agent says the seller is not willing to extend the Due Diligence Period. Can the buyer’s agent notify the listing agent by email that the buyer is terminating the contract?

Forms Guy: Perhaps. No particular form of notice is required in order for the buyer to terminate the contract during the Due Diligence Period, nor, for that matter, must the notice be signed. Assuming the listing agent’s email address was inserted in the “Listing Agent Notice Address” section of the contract, the contract could be properly terminated by a notice sent to that email address.

However, notice that I said “perhaps.” That’s because there could still be a legal question about whether the buyer’s agent had the authority to terminate the contract. A real estate agent ordinarily does not have the authority to exercise a contractual right on behalf of a party the agent represents. The party can give their agent that authority, but the agent may be required to prove that he or she had been given the authority to terminate the contract on the buyer’s behalf. For that reason, I would recommend that the buyer agent in a situation like this have the buyer sign a Notice of Termination (form 350-T) in advance that the buyer agent can transmit to the listing agent before the Due Diligence Period ends if the seller isn’t willing to extend it.

Lulu: Would it also be a good idea for the buyer’s agent to have an Amendment of Contract (form 330-T) signed by the buyer in advance if the seller is willing to grant an extension of the Due Diligence Period at the last minute?

Forms Guy: Yes, that would be a good idea. The point is that the buyer and the buyer’s agent need to be prepared in advance for different scenarios that may unfold. The buyer also should be readily available to consult with the agent and make decisions about what the buyer wants to do, depending on what the seller is or is not willing to do regarding repairs, extending the Due Diligence Period, etc.

Lulu: If the buyer decides to terminate the contract, I have a question about what form should be used. One of my agents was recently involved in a situation where her buyer client was unable to negotiate an agreement with the seller to make several repairs and thus decided to terminate the contract. My agent emailed the listing agent to inform her that the buyer was terminating the contract, and attached to the email a Termination of Contract by Mutual Agreement with Release of Earnest Money (form 390-T) that had been signed by the buyer. The seller refused to sign the form and has taken the position that the buyer did not properly terminate the contract during the Due Diligence Period, which has ended. According to the listing agent, my agent should have used the Notice to Seller That Buyer Is Exercising Their Right to Terminate the Offer to Purchase and Contract (Form 350-T). Is the listing agent correct?

Forms Guy: I do think that your agent should have used form 350-T rather than form 390-T in this situation. Form 350-T provides that the buyer “hereby terminates the contract” for one of the specified reasons listed in the form and thus clearly notifies the seller that the buyer is terminating the contract. Form 390-T does not contain any such language and a buyer’s submission of such a form to the seller might be characterized as an offer to terminate rather than a notice of termination.

However, I also think there is an argument to be made that under the specific facts of the situation your agent was involved in, the contract was properly terminated during the Due Diligence Period. As I noted earlier, no particular form of termination notice is required. Any written notice that clearly evidences the buyer’s decision to terminate is sufficient. Your agent indicated in the cover email that the buyer was terminating the contract. I think that your agent’s email arguably clarifies the buyer’s intent to terminate, and that the email and the signed form 390-T, taken together, constitute a written notice of termination sufficient to terminate the contract.

Lulu: It doesn’t sound as though it’s real clear whether the buyer properly terminated the contract before the Due Diligence Period ended.

Forms Guy: I agree. To avoid this messy situation, I recommend that form 350-T be used to terminate a contract during the Due Diligence Period, or for any of the other reasons listed in that form.

Lulu: When should form 390-T be used?

Forms Guy: In my opinion, form 390-T should be used in situations where a contract needs to be terminated by mutual agreement rather than by unilateral notice of termination from one party to the other.

Lulu: Thanks, Forms Guy!

Forms Guy: You’re welcome, Lulu. Avoiding last-minute repair negotiations is the best risk-management strategy for minimizing the kinds of problems that you and I have been discussing. However, if the end of the Due Diligence Period is near and the parties are still trying to work things out, the agent representing the buyer should not have a casual attitude about the end of the Due Diligence Period because the potential consequences to the buyer for allowing the Due Diligence Period to expire without an agreement on repairs are significant. v