The Back-up Contract Addendum and Payment of the Due Diligence Fee

QUESTION: A couple weeks ago, my client accepted a back-up contract on her home, and yesterday the first contract terminated during due diligence. I notified the back-up buyer’s agent the same day that their contract had become primary and was no longer the back-up.

Today the back-up buyer’s agent sent me a notice of termination. I emailed the agent and asked that the back-up buyer send my client the Due Diligence Fee. However, the agent responded that their client did not need to pay, because the Back-up Contract Addendum indicated that the Due Diligence Fee was not due for five days. Is the buyer’s agent correct?

ANSWER: No. Paragraph 9(a) of the Back-up Contract Addendum (Form 2A1-T) states that “[a]ny Due Diligence Fee provided for in this Contract shall be due and payable within five (5) days after delivery to Buyer of Notice of Primary Status.” (Emphasis added). This provision does not conflict with the Offer to Purchase and Contract (Form 2-T), which provides that the Due Diligence Fee “shall be the property of the seller upon the Effective Date[.]” The Effective Date is not altered by the Back-up Contract Addendum, which means it is the date listed in the Form 2-T, not the date that the back-up contract moves into primary status.

Paragraph 9(a) of Back-up Contract Addendum merely outlines the timing for payment of the Due Diligence Fee. The fee becomes due and payable immediately upon the back-up buyer’s receiving notice of primary status, and the fee is late if the back-up buyer fails to pay within five days. Should the back-up buyer fail to timely pay the Due Diligence Fee, the seller can send a notice for payment. If the back-up buyer thereafter fails to pay the fee within one banking day, the seller has the right to terminate. The timing of payment does not alter who owns the Due Diligence Fee upon the contract’s execution. It is the property of the seller unless the parties reach another agreement in writing.

Release Date: 9/7/2017; revised 08/21/2020; 12/28/2021

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