When does a back-up contract become binding?

QUESTION: We represent a seller who is under contract to sell her home. A buyer agent representing another buyer recently delivered an Offer to Purchase and Contract with a Back-Up Contract Addendum attached, along with checks for the Due Diligence Fee and Initial Earnest Money Deposit.  Our firm is named as the Escrow Agent.  The seller has accepted the second buyer’s offer and we communicated that to their agent.

I have a couple of questions. First, is the Back-Up Contract a binding contract now or does it become binding only if and when the contract between the seller and the first buyer is terminated?  Two, what do we do with the DDF and Initial EMD checks?

ANSWER: To answer your first question, the Back-Up Contract became binding when it had been signed by both parties and the seller’s acceptance was communicated to the buyer agent.  The parties’ respective obligations to complete the transaction are indeed contingent on the primary contract being terminated, but the existence of that contingency doesn’t mean that the Back-Up Contract isn’t a binding contract now.

To answer your second question, since the Back-Up Contract has become binding, the EMD should be deposited in your firm’s trust account no later than 3 days following the Effective Date of the Contract. On the other hand, the Real Estate Commission’s Rule on handling trust money (58A.0116(b)(4)) requires you to either deliver the Due Diligence Fee to the seller or return it to the buyer, according to the instructions of the buyer, no later than three business days after the Effective Date of the Contract.  Thus, you should contact the buyer agent for the “back-up” buyer and request instructions on what to do with the DDF check.

Note that paragraph 9 of the Back-Up Contract Addendum provides that the DDF becomes due and payable within five days after the seller has notified the buyer under the Back-Up Contract that the Back-Up Contract has become primary.  It’s the Buyer’s choice, but presumably, he or she would prefer to have the DDF delivered to the Seller only if and when the Back-Up Contract becomes primary. If that’s the case, you need to return the DDF to the buyer agent right away in order to be in compliance with the Real Estate Commission’s Rule.

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