When may a buyer terminate a contract if there is a problem with the seller’s title?

QUESTION: My buyer client is under contract using the Offer to Purchase and Contract (Form 2-T). As a result of his inspections, the buyer wants to negotiate either a reduction in the purchase price or a substantial credit in lieu of repairs. I was preparing an Agreement to Amend Contract (form 4-T) to present to the listing agent for the seller’s consideration when the listing agent called to inform me that she had just found out that there is a problem with the title to the property. The problem can supposedly be fixed if the seller’s sister—who he hasn’t seen or spoken to in years—will sign a quitclaim deed to him.

My question is, may the buyer terminate the contract now for breach of contract and get a refund of his due diligence fee and due diligence costs, or should he still attempt to amend the contract to reduce the purchase price or get a credit in lieu of repairs?

ANSWER: We think it’s premature for the buyer to terminate for breach of contract. The seller is obligated to deliver “good” title to the property by general warranty deed no later than Settlement. It’s possible that the seller may be able to fix the title problem in time to convey the property to your client. We think the most prudent course of action would be for your client to try to negotiate either a mutually agreeable amendment to or termination of the contract, and, if he can’t come to terms with the seller, terminate the contract before the end of the Due Diligence Period.

If the seller won’t agree to an acceptable amendment to or termination of the contract, it may be tempting for your client not to terminate the contract before the end of the Due Diligence Period, in hopes that the seller won’t be able to timely cure the title problem and thus be liable to the buyer for a refund of his Due Diligence Fee and other due diligence costs. However, this would be a gamble on the buyer’s part because if the seller is able to fix the title problem, the buyer would be obligated to complete the transaction at the original price. Also, just because your buyer may have a valid claim for damages based on the seller’s breach of contract doesn’t mean the buyer will necessarily recover what he’s owed if the parties end up in a dispute.

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