Legal Quiz

Test your knowledge of the back-up contract addendum

BY WILL MARTIN, GENERAL COUNSEL

Legal Quiz Questions

1. A back-up contract created using the Back-Up Contract Addendum (Form 2A1-T) becomes binding only if and when the seller notifies the buyer that the primary contract has been terminated. True or False?

2. Since a back-up contract becomes effective when signed, the back-up buyer may begin conducting due diligence immediately. True or False?

3. The seller may not amend or modify the primary contract if there is a back-up contract on the seller’s property. True or False?

4. The Initial Earnest Money Deposit becomes due and payable if and when the seller notifies the buyer that the back-up contract has become primary. True or False?

5. If the seller notifies the back-up buyer that the back-up contract has become primary, the backup buyer is not obligated to pay the due diligence fee so long as they terminate the back-up contract within two days. True or False?

6. Once the seller provides written notice to the buyer stating that the back-up contract has become primary, the back-up buyer is obligated to perform the back-up contract. True or False?

7. The seller may accept multiple back-up contracts and later decide which back-up buyer to proceed with if the primary contract is terminated. True or False?

8. The Back-Up Contract Addendum may not be used to create a second back-up contract. True or False?

9. When completing an offer that includes a Back-Up Contract Addendum, a buyer agent should insert a date in the Settlement Date blank in paragraph 1(l) of Offer to Purchase and Contract that is the buyer agent’s best educated guess about when Settlement of the backup contract will take place, based on the circumstances existing at the time of the offer. True or False?

10. If a seller enters into a back-up contract, the listing agent is not obligated to let the primary buyer know about the existence of the back-up contract. True or False?

HOW DID YOU DO? Discover the answers below.

Legal Quiz Answers

1. False. A back-up contract using the Back-Up Contract Addendum becomes binding when signed by both parties, and the seller’s acceptance is communicated to the buyer agent, just like any other contract. The parties’ respective obligations to complete the transaction are indeed contingent on the primary contract being terminated, but the existence of that contingency doesn’t mean that the back-up contract isn’t a binding contract. (When does a backup contract become binding? Release date: 12/08/15, Category: Forms/Addenda to Offer to Purchase and Contract)

2. False. Paragraph 9(b) of the Addendum provides that the Due Diligence Period begins following the seller’s notification to the buyer that the primary contract has terminated, and it runs for the number of days specified in the blank in that paragraph. (Is a back-up buyer entitled to conduct due diligence before becoming the primary buyer? Release date: 05/30/17, Category: Forms/Addenda to Offer to Purchase and Contract)

3. False. Paragraph 4 of the Addendum states that “[m] odification of the terms or conditions of the Primary Contract, including extensions of time, shall not constitute a termination of the Primary Contract and shall not cause this Back-up Contract to move into a primary position.”

4. False. Paragraph 6 of the Addendum provides that the Initial EMD must be deposited within three days following the effective date of the back-up contract.

5. False. Paragraph 9(a) of the Addendum provides that the DDF must be delivered within two days after the seller notifies the back-up buyer that the back-up contract has become primary. It also clearly states that the DDF becomes due and payable at the time of the seller’s notice. (The Back-Up Contract Addendum and Payment of the Due Diligence Fee, Release date: 09/07/17, Category: Forms/ Addenda to Offer to Purchase and Contract)

6. False. Tricky question. According to paragraph 10 of the Addendum, the back-up buyer’s right to terminate the back-up contract ends when the buyer receives “Notice of Primary Status” from the seller. However, written notice that the back-up contract has become primary is not, by itself, sufficient. According to paragraph 8 of the Addendum, the seller must provide two items to the buyer: (1) notice that the back-up contract has become primary and (2) written evidence that the primary contract has been terminated. Documents that will suffice as evidence that the primary contract has been terminated are listed in paragraph 2 of the Addendum. (Back-Up Contracts, Notice of Primary Status, and the Due Diligence Fee, Release date: 07/16/20, Category: Forms/Addenda to Offer to Purchase and Contract) 7. False. As noted in question # 1’s answer, when an offer containing a Back-Up Contract Addendum is signed, and acceptance is communicated to the buyer or the buyer’s agent, a binding contract is formed. If a seller accepts more than one back-up contract using the Addendum as written, they would be under contract with two buyers for one property at the same time. According to paragraph 8 of the Addendum, the seller is required to promptly notify the back-up buyer if the primary contract is terminated. The seller is not at liberty to choose which back-up buyer to do business with by providing the required notice to only one of the back-up buyers but not the other(s). (Can the Back-Up Contract Addendum be used to create more than one back-up contract? Release date: 08/06/20, Category: Forms/Addenda to Offer to Purchase and Contract)

8. True. The Addendum is only designed for one backup contract at a time. If a seller wants to accept a second back-up contract, an attorney should be engaged to create a custom addendum or modify the Back-Up Contract Addendum to make the obligations of the seller and the second back-up buyer contingent on both the primary contract and the first-back up contract being terminated. (Can the Back-Up Contract Addendum be used to create more than one back-up contract? Release date: 08/06/20, Category: Forms/Addenda to Offer to Purchase and Contract)

9. False. Although at the time of writing a back-up offer, it is not known if or when the primary contract will terminate, the buyer agent doesn’t need to guess at a Settlement Date for the back-up contract because under paragraph 9(c) of the Addendum, the parties agree that the Settlement Date will be an agreed number of days following the seller’s delivery of Notice of Primary Status. The “NOTE” at the end of paragraph 9 of the Addendum instructs agents to insert “See attached Back-Up Contract” in the blanks for both the Settlement Date and Due Diligence end date in the Offer to Purchase and Contract.

10. True. The existence of the back-up contract is not a material fact that would have to be disclosed to the primary buyer. According to the Real Estate Commission’s License Law and Rule Comments, material facts include facts relating directly to the ability of the agent’s principal to complete the transaction. The existence of the back-up contract does not relate directly to the ability of the seller to complete the transaction with the primary buyer. (Disclosure of Back-Up Contract, Release date: 02/29/12, Category: Disclosure)

STUDY HARD: If you’re not doing so already, be sure to read the Q&As that appear in the REALTOR® Rundown every Monday. It’ll help you on the next quiz!