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Weekly Q&As

Which form should I use to terminate a contract during the Due Diligence Period?

Release Date: 12/20/2016

This email address is being protected from spambots. You need JavaScript enabled to view it., Martin & Gifford, PLLC

QUESTION: I am representing a buyer who is under contract using the Offer to Purchase and Contract (form 2-T). She paid a Due Diligence Fee of $500 and an Initial Earnest Money Deposit of $2,500. After doing inspections, she has decided she wants to terminate the contract. The Due Diligence Period ends tomorrow at 5 PM. There are two different forms that look like they would work. One is the Notice to Seller that Buyer is Exercising Their Unilateral Right to Terminate the Offer to Purchase and Contract (form 350-T), and the other is the Termination of Contract by Mutual Agreement With Release of Earnest Money (form 390-T). Which one should I use in this situation? 

ANSWER: We recommend you use form 350-T. Either form would work, but 350-T only requires the buyer’s signature to accomplish the termination, while form 390-T requires signature by both the buyer and the seller to be effective. As its name suggests, form 390-T requires mutual consent of the parties. If you transmit a form 390-T signed by the buyer to the listing agent and for some reason the seller fails to sign it before the end of the Due Diligence Period, an argument can be made that the contract was not terminated before the end of the Due Diligence Period and the buyer would not be entitled to a refund of her Earnest Money Deposit if she fails to complete the transaction. 

On the other hand, form 350-T is designed for the buyer to exercise her unilateral (or one-sided) right to terminate the contract for any reason or no reason during the Due Diligence Period (see paragraph 4(f) of the Contract). It’s true that there’s a place for the seller to sign on the second page of form 350-T, but it’s simply an authorization for the Escrow Agent to return the Earnest Money Deposit to the buyer. Transmitting a signed form 350-T to the listing agent before the end of the Due Diligence Period effectively terminates the contract. The seller’s failure to sign the second page doesn’t change that, although it could cause a delay in the return of the EMD. (For a discussion of that issue, see Q&A titled “Can my firm disburse an earnest money deposit without the consent of both parties?” in the archived Q&As under the category “Real Estate License Law and Rules.”)

Form 390-T is a very useful form that can be used to terminate a contract by mutual consent in many different situations, including this one. However, since time is of “of the essence” regarding the end of the Due Diligence Period, we think form 350-T is the better form to use in this situation, given the critical importance of timely and clearly notifying the seller of the buyer’s decision to terminate the contact.

NC REALTORS® provides articles on legal topics as a member service. They are general statements of applicable legal and ethical principles for member education only. They do not constitute legal advice. The services of a private attorney should be sought for legal advice.

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