The Due Diligence money is for the seller to keep whether you decide to go with the purchase or if you back out as long as the seller doesn’t breach the contract. In North Carolina a buyer has a level of protection and can get their Due Diligence money back if the seller breaches the Offer to Purchase and Contract. For instance, if inspection uncovers issues that the seller agrees to fix, then they must be fixed in an acceptable workmanlike manner before the settlement date. Failure to complete repairs before the closing date would be considered breach of a contract. Subsequent to the repair, a buyer has the right to verify the repairs have been completed satisfactorily, during or after the “Due Diligence” period and to do a final walk-through. The seller’s failure to permit the buyer to verify repairs or to do a final walk-through is a breach of the contract. Likewise, if the improvements on the property are destroyed or there is a material damage prior to settlement date then the buyer is entitled to terminate the contract and receive a full refund of all Due Diligence and Earnest Money deposit even if the discover is after the expiration of the due diligence period but before settlement date. Lastly, if the buyer has a contingency sale addendum to sell their home as part of the contract and the seller terminates the contract then the seller must refund the due diligence fee to the buyer.
What entails breach of a contract?
Breach of a contract occurs when the seller fails to comply with any one of the items outlined in Seller Obligations under paragraph 8 or Risk of Loss under paragraph 12 of the North Carolina 2-T Offer to Purchase and Contract. Paragraph 8 of the Offer to Purchase and Contract last revised since this article in 7/2018 outlines fourteen obligations expected of the seller. If the seller doesn’t fulfill any one of these 14 requirements, the buyer is entitled to their full refund of the due diligence and earnest money after the due diligence period expires.
What are Seller Obligations?
The seller has 14 contractual obligations defined in paragraph 8 of the Offer to Purchase contract that have to be met following the Effective Date of the contract. They include:
8(a) release of copies of all title documents, easements, deeds of trust, surveys, and covenants as well as loan information for the buyer’s attorney to obtain payoff statements from lenders, and a non-foreign status affidavit;
8 (b) authorizations to disclose information like title insurance to buyers’ and their attorneys;
8 (c) allowing access to the property for inspections, validation of completing repairs, final walk-through inspections;
8 (d) removal of seller’s personal property not part of the purchase like garbage, old paint, debris;
8 (e) Affidavit to indemnify the buyer from any liens that could be placed on the property from work performed 120 days prior to settlement date;
8 (f) payment of ad valorem taxes, liens or other charges against the property;
8 (g) Good Title and Legal access by delivering General Warranty Deed before settlement date free of encumbrances or defects, unviolated covenants and legal access to public right of way;
8 (h) Deed, taxes and local conveyance fees paid by seller;
8 (i) Agreement of the Seller to pay buyers’ concessions. These could include 1.) lender closing costs and 2.) FHA/VA inspection costs (well/water, septic/sewer, wood destroying insect) that discretion to DVA may not be allowed to be paid by the buyer;
8 (j) Prorated Owner’s Association Fees and charges need to paid by the Seller by settlement date;
8 (k) Payment of Special Assessments
8 (l) Late listing tax penalties;
The following two paragraphs (l) and (n) are quoted exactly as they appear on the Offer to Purchase contract:
8 (m) Negotiated Repairs/Improvements: Negotiated repairs/improvements shall be made in a good and workmanlike manner and Buyer shall have the right to verify same prior to Settlement.
8(n) Seller’s Failure to Comply or Breach: If Seller fails to materially comply with any of Seller’s obligations under this Paragraph 8 or Seller materially breaches this Contract, and Buyer elects to terminate this Contract as a result of such failure or breach, then the Earnest Money Deposit and the Due Diligence Fee shall be refunded to Buyer and Seller shall reimburse to Buyer the reasonable costs actually incurred by Buyer in connection with Buyer’s Due Diligence without affecting any other remedies. If legal proceedings are brought by Buyer against Seller to recover the Earnest Money Deposit, the Due Diligence Fee and/or the reasonable costs actually incurred by Buyer in connection with Buyer’s Due Diligence, the prevailing party in the proceeding shall be entitled to recover from the non-prevailing party reasonable attorney fees and court costs incurred in connection with the proceeding.
What is Risk of Loss?
Paragraph 12 titled Risk of Loss of the Offer to Purchase and Contract also gives the buyer the right to terminate and be entitled to a refund of the Due Diligence deposit. This would apply to cases when the property improvements done upon the land are damaged in any way due to fire or other human or non-human destructive forces before the settlement date. The buyer may terminate the contract upon written notice to sellers and receive full refund of the Due Diligence deposit and Earnest money. If the buyer proceeded with the purchase of the property they would be entitled to receive insurance proceeds for the damage in addition to the property.
What is Contingency Sale Addendum?
Finally, a buyer may receive a refund of their due diligence fee if a contract addendum that provides for it was submitted with and as part of the Offer to Purchase contract. The Contingent Sale Addendum (2A2-T) states in Paragraph 2 that if a seller elects to terminate the contract during the due diligence period then the seller must refund the due diligence fee to the buyer.
To summarize, the due diligence fee is paid to the seller following formation of the contract and in general is retained by the seller except in rare circumstances. Unless the contract was materially breached by the seller, where the seller 1) failed to materially comply under Paragraph 8 of the Offer to Purchase and Contract, 2) the contract was terminated under Paragraph 12 of the Offer to Purchase and Contract, or if 3) explicitly provided for in a contract addendum, then the buyer is not entitled to a due diligence fee refund.