Recently, I was presented a scenario wherein a Buyer and Seller entered into a standard Offer to Purchase and Contract with a substantial, non-refundable Due Diligence Fee. Shortly after the Contract was executed, the Buyer began their due diligence inspections. Prior to the completion of the inspection period, the Seller informed the Buyer that the Seller would not entertain any repair requests or reductions in the agreed upon purchase price - the property would be sold As-Is.The Buyer felt this pronouncement by the Seller was unfair. The Buyer was not going to purchase the property in an As-Is condition and claimed that he would never have deposited such a Due Diligence Fee for a property being sold As-Is.
The Buyer felt that the Seller should have stated that the property would be sold As-Is from the outset, prior to the execution of the Contract. [There was some speculation that the Seller had a back-up offer and was negotiating strongly with the Buyer so that the Buyer would terminate the Contract.]
The Buyer was prepared to terminate the Contract and begin a search for another property, but he wanted his Due Diligence Fee returned. The Seller was uncooperative, initially. Technically, under the terms of the Contract, the Seller may have retained the Buyer’s Due Diligence Fee: under the Contract, the Due Diligence Fee is much like an option fee, and even though the Buyer may request concessions from the Seller based on inspection reports provided during the due diligence period, the Seller is under no obligation to make any concessions.
However, the Seller ultimately released the Due Diligence Fee (and Earnest Money Deposit) to the Buyer based on the Buyer’s assertion of the Implied Covenant of Good Faith and Fair Dealing. In every contract there is an implied covenant of good faith and fair dealing that the parties to a contract will deal with each other honestly and fairly, and that neither party will do anything which injures the right of the other to receive the benefits of the contract. A claim under this Covenant usually arises when one party attempts to enforce specific terms under a contract despite the general understanding of the parties.
Since the facts in this case indicate that the Buyer would not have otherwise agreed to the contracted amount of the Due Diligence Fee, and that it is not commonplace for a Seller to state that the property will be sold in an As-Iscondition after the contract has been executed, the Implied Covenant of Good Faith and Fair Dealing was successfully put forth by the Buyer to secure a termination of the Contract and the refund of the Buyer’s Due Diligence Fee.
Published by John F. Renger on December 1, 2016