Is the seller’s failure to timely deliver a lease to the buyer a breach of contract?

QUESTION: My client is purchasing a property that is currently rented to a tenant pursuant to a written lease. The Additional Provisions Addendum (Form 2A11-T) attached to the contract obligated the seller to deliver a copy of the lease by this past Monday. The seller provided some information about what the lease terms are, but still has not delivered the lease. Now it’s Friday, our Due Diligence Period expires today, and my client really wants to see the lease before deciding to terminate or proceed. Is the seller in breach? If so, must the seller return the Due Diligence Fee and reimburse the buyer’s other costs if the buyer terminates?

ANSWER: Paragraph 23 of the Offer to Purchase and Contract (Form 2-T) states that a buyer may be entitled to damages, including the return of their Due Diligence Fee, if a seller materially breaches the agreement. Under North Carolina law, a material term of a contract “is one that is essential to the transaction, that is, a term which, if omitted or modified, would cause one of the parties to withhold assent or to bargain for a substantially different term.” Not every term in a contract is material, and a party’s failure to fulfill a non-material term will not be considered a breach. In determining whether a term is material, our courts consider: the subject and purpose of the contract; the parties’ intentions; the scope of performance reasonably expected by each party; prior dealings of the parties, if any; any common custom, practice, or usage known to other reasonable persons in similar situations that the parties knew or should have known about; and any other relevant factors.

Leases are interests in real property, which means a buyer purchasing tenant occupied property steps into the shoes of the seller-landlord. The current written lease will continue to control after Closing, and it does not expire just because the property is transferred to a new owner. Given the impact the lease will have on the buyer’s interest in the property upon conveyance, your client has an argument to make that failure to timely deliver the lease with enough time to review it prior to the end of the Due Diligence Period is a material breach.

The seller may have a contrary argument to make, however. Form 2A11-T does not say that time is of the essence with respect to the seller’s obligation to deliver the lease. The seller may argue that they have a reasonable amount of time to comply, even if the Due Diligence Period expires. The seller can also argue that the information he has provided so far is sufficient for the buyer to make an informed decision.

It is not clear which of these arguments would prevail in a court setting. If your client decides to timely terminate using Form 350-T, they can at least get their Earnest Money Deposit back and preserve their rights to potentially obtain other damages from the seller. If they decide to proceed despite the lease not being delivered, they may risk not being able to recover damages for the seller’s alleged breach pursuant to paragraph 23 of the contract. In either event, it would be prudent to advise your client to seek legal counsel first.