Duty of Good Faith and Disclosure of Material Facts

QUESTION: Closing is two weeks away, and my buyer needs to sell their existing home in order to obtain a loan and close. Today we received notice that the buyer of my client’s home is terminating. My client is freaking out and demanding that I do not tell the seller about the termination. My buyer is also debating whether to inform the seller next week that if my client does not receive a refund of their Due Diligence Fee, they will delay terminating the current transaction all the way through the grace period in the contract. What do I do?

ANSWER: You need to immediately disclose to the seller or listing agent that your client may not be able to close. You also need to inform your client to seek legal counsel regarding the potential negotiation of the Due Diligence Fee.

The North Carolina Real Estate Commission has long instructed that a principal’s ability to complete a transaction is a material fact. This category of material fact “includes any fact that might adversely affect the ability of a principal (seller or buyer) to consummate the transaction such as: [1] a buyer’s inability to qualify for a loan, [2] a buyer’s inability to close on a home without selling a currently owned home, or [3] a seller’s inability to convey clear title due to the commencement of a foreclosure sale or judgment lien on the property.” 2022-2023 General Update Course, Section 1, Material Facts: Speak Up! Failure to disclose a material fact is the number one reason why agents are disciplined by the Commission. Here, your client’s likely inability to close is clearly a material fact that must be disclosed to the listing agent regardless of your client’s direction to the contrary.

As for the strategy to obtain a refund of the Due Diligence Fee, your client needs to be informed by legal counsel that every contract has an implied duty of good faith and fair dealing. North Carolina Courts have “consistently held that [i]t is a basic principle of contract law that a party who enters into an enforceable contract is required to act in good faith and to make reasonable efforts to perform his obligations under the agreement.” Blondell v. Ahmed (NC Court of Appeals 2016). Here, it sounds like your client may attempt to violate that duty in an attempt to obtain a refund of the Due Diligence Fee. Assisting your client in this endeavor may expose you to liability and violate both the License Law and the Code of Ethics. As such, it would be best to strongly advise them to use legal counsel in order to negotiate a termination of the transaction.

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