Is the contract terminated if the seller doesn’t sign Form 390-T before the end of Due Diligence?

QUESTION: Toward the end of the Due Diligence Period, my buyer signed Form 390-T (“Termination of Contract by Mutual Agreement with Release of Earnest Money Deposit”), and I sent it to the listing agent. In the termination, my client asked for the Earnest Money Deposit (“EMD”) and the Due Diligence Fee (“DDF”) as a result of the seller’s failing to disclose a known issue with the home’s foundation. The email accompanying the termination clearly indicated that my buyer intended to terminate the contract, which is on Form 2-T, regardless of whether the seller agreed to refund any monies. The seller never signed the termination before the end of the Due Diligence Period, despite numerous requests to do so.

The listing agent is now claiming that we are still under contract and that my buyer has forfeited the EMD. My client needs their money back so they can make an offer on another home. Is the contract terminated? Is my client entitled to the EMD and DDF?

ANSWER: We believe the contract is terminated and your buyer is entitled to the EMD, but we cannot be certain that a court would reach the same conclusion.

Our Q&A library contains several articles that touch on this subject, though not directly. You can access them on our website, ncrealtors.org. In these articles, we have written that where the buyer is up against the end of the Due Diligence Period, buyers should use the unilateral termination forms, Form 350-T and Form 351-T (for vacant land). Using these unilateral termination forms will ensure the buyer has clearly communicated their intent to terminate and preserve the buyer’s right to the EMD. If the buyer believes the seller should additionally refund the DDF or reimburse the buyer for other costs due to an alleged omission or misrepresentation, the buyer can still assert those claims at a later time, including after the contract has been terminated.

We have also written that, generally speaking, Form 390-T and Form 391-T (“Termination of Contract by Mutual Agreement without Release of Earnest Money Deposit”) require both parties to sign and agree to the same terms of termination in order for the termination to be effective. This is because both forms state that the termination “shall be effective on the date that it has been signed by all of the Parties.” It is important to note that each of these forms also has a release whereby both the buyer and seller waive their rights to pursue legal claims against the other once the termination is fully executed and effective.

We have finally written that absent special authority, such as a power of attorney, brokers generally do not have the power to bind their clients to a contract. This includes an agreement to terminate a contract. The Offer to Purchase and Contract (Form 2-T) requires that any changes to the contract be in writing and signed by the parties, not the agents.

The above principles show that your sending Form 390-T was not the best way to guarantee the transaction was timely terminated. However, we nevertheless believe your buyer has a good argument to make that the requirements for termination have been met.

Form 2-T does not require the buyer to send any particular kind of notice in order to terminate. Paragraph 4(g) of the contract simply says that the buyer “shall have the right to terminate this Contract for any reason or no reason, by delivering to Seller written notice of termination (the “Termination Notice”) during the Due Diligence Period[.]” The only requirement is that the notice evidence a clear intent to terminate. Given that your email unequivocally explained the buyer’s intent to terminate, we believe that your email, together with the signed Form 390-T, were enough to constitute the Termination Notice. This means your buyer is likely entitled to the EMD.

The refund of the DDF, however, is a different analysis that depends on whether the seller had a duty to disclose the foundation issue and whether they breached that duty. It is not a breach of contract claim. You can read our Q&A that addresses this kind of disclosure issue, and the buyer’s remedies, here.

We must stress that our analysis of your case is not binding. A court could reach the opposite conclusion, especially if the intent to terminate is not clearly communicated. We strongly encourage brokers to send the proper termination form in order to make sure a contract is timely terminated during the Due Diligence Period.