On Due Diligence and the Time of Day

Dear Forms Guy: I’m working with a buyer who wants to make an offer on a property using the Offer to Purchase and Contract (form 2-T). We want to write up an offer that includes a Due Diligence Fee, no Initial Earnest Money Deposit, and an Additional Earnest Money Deposit that would be payable no later than one day following the end of the Due Diligence Period. I have a few questions I’d like to run by you about the timing on paying those fees. Is that okay?

Sincerely, Spanky

Dear Spanky: Go for it. Sincerely, Forms Guy

Spanky: Great. My first question is should the Due Diligence Fee be given to the listing agent when I present the offer?

Forms Guy: You could deliver the Due Diligence Fee with the offer, but you don’t have to. The contract states that any Due Diligence Fee must be “made payable to Seller by the Effective Date” (see paragraph 1(d)).

Spanky: But if the seller accepts my client’s offer and the listing agent notifies me of that fact, is there even a contract if the Due Diligence Fee hasn’t been delivered?

Forms Guy: I think it’s pretty clear from the wording of the form that a contract would be created when the listing agent notifies you that the seller has signed the buyer’s offer, even though at that moment the Due Diligence Fee has not been delivered. There’s a mechanism at the end of paragraph 4 that permits the seller to terminate the contract following written notice to the buyer if the Due Diligence Fee or the Initial Earnest Money Deposit hasn’t been delivered by its due date. In my view, the wording of that mechanism clearly indicates an understanding by the parties that a contract does exist, subject to the seller’s right to terminate it if the buyer doesn’t deliver the Due Diligence Fee following notice from the seller. Of course, a prudent buyer’s agent should promptly deliver the Due Diligence Fee upon notification that the seller has accepted the buyer’s offer.

Spanky: If I do deliver the Due Diligence Fee with the offer, can the listing agent give it to the seller even before the seller accepts the offer?

Forms Guy: It’s certainly possible that could happen.

The N.C. Real Estate Commission’s rule on the handling and accounting of funds provides that if a check from the buyer made payable to the seller is delivered to a real estate agent, the agent must either deliver it to the seller or return it to the buyer according to the instructions of the buyer. For that reason, I would suggest that any Due Diligence Fee delivered with an offer be accompanied by written instructions to the listing agent authorizing and directing the listing agent to deliver the Due Diligence Fee to the seller only if and when the buyer and seller enter into a contract. It doesn’t become the seller’s property unless and until a contract has been created, but once the seller has it in his or her possession, it may be tough to get it back.

Spanky: Understood. Moving on to the Earnest Money Deposit, can the buyer and seller enter into a binding contract without the buyer making an Initial Earnest Money Deposit?

Forms Guy: Yes, assuming of course the seller is willing to accept an offer that doesn’t include an Initial Earnest Money Deposit.

Spanky: As I said earlier, the buyer would like to tie the payment of an Additional Earnest Money Deposit to the expiration of the Due Diligence Period, so that the buyer won’t have to pay the deposit if the buyer terminates the contract during the Due Diligence Period. Is that okay?

Forms Guy: Yes.

Spanky: How would you recommend I fill in the blank for the time that the Additional Earnest Money has to be delivered?

Forms Guy: Assuming the Additional Earnest Money Deposit is to be delivered no more than one day after the end of the Due Diligence Period, and assuming you use a specific date for the end of the Due Diligence Period, you would put the next day’s date in the blank. For instance, if the Due Diligence Period ends on Oct. 15, you would insert “5:00 p.m. on Oct. 16” in the blank for the delivery date of the Additional Earnest Money Deposit. On the other hand, if the Due Diligence Period is described as a specific number of days following the effective date, you would use the same formula for describing the delivery period of the Additional Earnest Money Deposit, increasing the number of days by one. For instance, if the Due Diligence Period is to end at

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5:00 p.m. on “the 14th day following the Effective Date,” you would insert “5:00 p.m. on the 15th day following the Effective Date.”

Spanky: Why the specific time of day?

Forms Guy: It’s not required, but if you don’t put in a time of day, I believe the contract would be interpreted to permit delivery of the Additional Earnest Money Deposit up until midnight of that day. When possible, avoiding the potential late-night performance of a contractual obligation is desirable in my opinion.

Spanky: Would it be a problem if I were to run into a snag getting the Additional Earnest Money to the listing agent by the time of day we agree on?

Forms Guy: Yes, that would potentially be a big problem. Unlike tardy delivery of the Due Diligence Fee or the Initial Earnest Money Deposit, the contract doesn’t require the seller to give the buyer one banking day’s notice before terminating the contract. Time is “of the essence” regarding delivery of the Additional Earnest Money Deposit. Although the contract wouldn’t end automatically, the seller could terminate it immediately following the end of the permitted delivery period. That may not happen, but believe me, Spanky, I’ve seen quite a few situations where the seller has jumped at an opportunity to terminate a contract with a buyer, usually because there’s a second buyer waiting in the wings who is willing to buy the property on terms more favorable to the seller.

Spanky: Even if I was five minutes late?

Forms Guy: Yes.

Spanky: I can’t believe a seller would do that!

Forms Guy: In case you haven’t noticed, there are a lot of rascals out there, Spanky. And forgive me for saying so, but what I can’t believe is that you would cut it so close on delivering the deposit before the deadline.

Spanky: Okay, okay. Any more words of wisdom?

Forms Guy: Yes, one more thing. Pay close attention to the fact that the Additional Earnest Money Deposit, unlike the Due Diligence Fee or the Initial Earnest Money Deposit, must be payable in cash or immediately available funds. If you present a personal check for the buyer for the Additional Earnest Money Deposit, the seller could refuse to accept it and then terminate the contract if the buyer can’t get you cash or immediately available funds before the payment deadline.

Spanky: Thanks, Forms Guy. Gotta go!

Forms Guy: You’re welcome, Spanky. Give my regards to the Gang. n

By Julie C. Woodson Director of Political Communications