Does a buyer owe the additional earnest money deposit if the contract is already terminated?

QUESTION: I recently listed a property and we quickly went under contract. The parties used the standard Form 2-T Offer to Purchase and Contract. A due diligence fee was paid and the due diligence period was set to expire last Wednesday. The contract also included an additional earnest money deposit, which was scheduled to be paid the day after the due diligence period ended by 5:00 P.M. On Thursday, the day after the due diligence period ended, I received notice from the buyer’s agent that the buyer was terminating. My sellers requested the buyer make the payment of additional earnest money as promised in the contract. The buyer and her agent responded that the buyer does not owe the additional EMD as the contract has been terminated. It is now past the time the additional EMD was scheduled to be paid. What do I tell my sellers?

ANSWER: Form 2-T obligates the buyer to pay the additional earnest money deposit, despite the contract being terminated prior to the date the additional EMD was required to be tendered. In the standard contract, a buyer is entitled to a refund of the EMD under limited circumstances. First, a buyer receives an EMD refund if they terminate prior to the end of the DD period. Second, a buyer is entitled to a return of their EMD and a refund of the Due Diligence Fee under paragraph 11, “If the Property is not in substantially the same or better condition at Closing as on the date of this offer, reasonable wear and tear excepted”. Lastly, a buyer may recover a refund of the DD fee, EMD and “reasonable costs actually incurred by Buyer in connection with Buyer’s Due Diligence” if the seller is in breach of the contract.

In your transaction, none of the conditions for a refund of the EMD are present. The buyer failed to terminate the contract within the due diligence period. There does not appear to be any claim that the property has been damaged or that the sellers breached the contract. Therefore, even though the contract is terminated, the buyer promised to pay the additional EMD at the time the contract became effective. You should advise your clients to speak to an attorney to recover the additional EMD.

This outcome is consistent with another Q & A found here. That Q & A confirms that if a buyer attempts to terminate a contract only minutes after the contract becomes effective, that buyer is still obligated to pay the DD fee to the seller. A buyer’s refusal to pay that DD fee will allow the seller to recover not only the DD fee but also the EMD and reasonable attorney fees. The lesson for buyer agents is to be sure that if their client wishes to terminate a contract, they do so prior to the expiration of the due diligence period. Otherwise, buyer agents must be diligent to ensure their clients terminate prior to the expiration of the due diligence period. Otherwise, buyers will almost certainly be obligated to pay and forfeit the EMD, whether already paid or still owing at a future date.

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