Back-Up Contracts, Notice of Primary Status, and the Due Diligence Fee

QUESTION: My buyer submitted a back-up offer that was accepted about a month ago, and the listing agent emailed me last week to say that our back-up contract was now primary and that he expected to have a signed termination of the primary contract soon. Yesterday, the listing agent called me and demanded to know why my client has not paid the Due Diligence Fee, and I explained that I was waiting on the termination. After speaking with my client about what’s going on, they have decided to terminate and move on. Can my buyer terminate, and if they do, do they have to pay the Due Diligence Fee?

ANSWER: Your client can terminate, and if they do, they are not obligated to pay the Due Diligence Fee.

The Back-Up Contract Addendum (Form 2A1-T) provides that the buyer can terminate any time prior to the buyer’s receiving Notice of Primary Status. Form 2A1-T specifically defines Notice of Primary Status as the buyer’s receiving two things: (1) a written notice that the Back-up Contract has become primary; and (2) a written release signed by all parties to the Primary Contract; a written notice of termination from the seller to the Primary Buyer that the seller is exercising a right to terminate the Primary Contract; a written notice of termination from the Primary Buyer to the seller that the Primary Buyer is exercising a right to terminate the Primary Contract; or a final judgment of a court of competent jurisdiction that the Primary Contract is invalid, illegal, unenforceable, or is otherwise terminated.

Even though you have received a notice that your back-up contract is primary, you have not yet received any of the required written notices that the Primary Contract is, in fact, no longer effective. This means your client has not received Notice of Primary Status and can terminate without liability. Since Form 2A1-T only requires payment of a Due Diligence Fee within 2 days of the buyer’s receiving Notice of Primary Status, your buyer will not be obligated to pay that fee once the Back-Up Contract is terminated. Your client can unilaterally terminate the Back-Up Contract by checking the appropriate box on either Form 350-T or Form 351-T, as applicable, and sending the termination to the listing agent.

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