Buyer’s Rights if Condition of Property Changes Between Offer and Closing

QUESTION: One of my listings was all set to close, but the buyer discovered during his final walk-through that the HVAC system wasn’t working properly. We had it checked out and unfortunately, it appears that one of the air conditioning units needs to be replaced to the tune of $6,000. The unit was working when the buyer had his home inspection performed. The buyer is demanding a refund of his $10,000 Due Diligence Fee and Due Diligence Costs (inspection and appraisal) based on the seller’s breach of the contract for failing to keep the property in the same condition as it was on the date of the offer. Does the seller have to refund the buyer’s Due Diligence Fee and Due Diligence Costs?

ANSWER: Assuming the parties used the July 2022 version of the Offer to Purchase and Contract (Form 2-T), if the seller fails to fix the HVAC system the seller would not have to refund the buyer’s Due Diligence Costs, but would be required to refund the Due Diligence Fee (“DDF”) and any Earnest Money Deposit (“EMD”). Paragraph 11 of Form 2-T provides that if the property isn’t in substantially the same condition at Closing as on the date of the buyer’s offer, the buyer has a choice of terminating the contract or proceeding with the contract. If the buyer proceeds with the contract, they would be entitled to the proceeds of any insurance claim the seller may have filed on account of any damage or destruction to the property. If the buyer elects to terminate the contract, the new version of Form 2-T now entitles the buyer to a refund of not only EMD they have paid, but also their DDF.

The reason the buyer in your situation would not be entitled to also recover his Due Diligence Costs is because a substantial change in the condition of the property between offer and Closing is actually not a breach of contract by the seller; rather, it excuses the buyer from having to perform the contract at the buyer’s option. Thus, if the buyer elects to terminate, the buyer is entitled to some, but not all, of what they have invested in the transaction. In other words, they would get their DDF back but not their Due Diligence Costs, which they would also be entitled to receive under paragraph 23 if the seller were in breach of contract.  Paragraph 11 should be viewed as an attempt to fairly balance the rights of the buyer and seller in a situation where the condition of the property has unexpectedly changed during the transaction, and it may or may not be feasible to return the property to its previous condition.

Since the buyer’s rights under paragraph 11 are triggered by the property not being in substantially the same condition at Closing as on the date of the offer, in our view the seller has the opportunity to restore the property to its previous condition. Thus, if your seller client replaces the air conditioning unit, the buyer’s performance would not be excused under paragraph 11. How long would the seller have to do that? Paragraph 11 does not specifically say, but in our opinion applying the 7-day delay period established under paragraph 12 would seem to be reasonable.