If Disclosure Statements aren’t timely delivered, does the buyer get their Due Diligence Fee back?

QUESTION: My buyer client made an offer on a property on June 2nd. He checked the second box in paragraphs 5(d) and 5(e) of the Offer to Purchase and Contract (Form 2-T) because the required Disclosure Statements were not available to him or me before the offer was made. Several hours after I sent the offer to the listing agent, she sent me signed copies of both Disclosure Statements. The seller accepted the offer on June 3rd and I delivered the Due Diligence Fee to the listing agent’s office that same day.

On June 5th, the buyer decided to terminate the contract based on the fact that he had not received the Disclosure Statements before he made his offer. I sent a signed notice of termination (Form 350-T) to the listing agent that day along with a request for a refund of the Due Diligence Fee. The seller refuses to refund the DDF because: (1) the contract says it is nonrefundable; (2) the seller provided the Disclosure Statements before the property went under contract; and (3) a lawyer told him that even if the Disclosure Statements were not timely delivered, the Residential Property Disclosure Act says that the buyer is only entitled to a refund of any “deposit” paid, and the Due Diligence Fee is not a “deposit.” What do you think?

ANSWER: We think the buyer is likely entitled to a refund of the Due Diligence Fee. Section 47E-5 of the Residential Property Disclosure Act (the “Act”) permits a buyer to cancel any real estate contract if the Disclosure Statements “are not delivered to the purchaser prior to or at the time the purchaser makes an offer.” In such a case, the buyer’s right to cancel must be exercised prior to the end of the third calendar day following the purchaser’s receipt of the disclosure statement or the end of the third calendar day following the date the contract was made, whichever occurs first. This is restated in paragraphs 5(d) and 5(e) of Form 2-T.

In your situation, since neither of the Disclosure Statements were available to the buyer before he made an offer, he had a right to cancel the contract anytime before the end of the day on June 5th (three calendar days following his receipt of the Disclosure Statements on June 2nd), which he did. An argument that the buyer didn’t have the right to terminate because he received the Disclosure Statements before a contract was signed is without merit because Section 47E-5 of the Act plainly permits a buyer to terminate if they receive the Disclosure Statements after they make an offer but before they go under contract, provided they do so within three calendar days following receipt of the Disclosure Statements.

What about the argument that the Due Diligence Fee is not a “deposit” and thus not refundable according to Section 47E-5 of the Act? In our view, whether or not that may be a valid argument is beside the point because paragraphs 5(d) and 5(e) of Form 2-T specifically provide that the buyer’s right to terminate the contract without penalty in a situation like this includes a refund of any Due Diligence Fee. In our opinion, the contract between the parties is controlling. It’s true that the Due Diligence Fee is generally nonrefundable, but there are exceptions, and this is one of them.

Your situation highlights the importance of ensuring that the Disclosure Statements are available to a buyer before they make an offer.