Non-Satisfaction of Condition vs. Breach

QUESTION: Paragraph 23(b) of the Offer to Purchase and Contract (Form 2-T) states that if Seller materially breaches the contract, and Buyer elects to terminate the Contract as a result of such failure or breach, the Earnest Money Deposit (“EMD”) and the Due Diligence Fee (“DDF”) shall be refunded to Buyer. In contrast, there is language in paragraph 1(e) of the Contract that states that if a condition of the Contract is not satisfied, the EMD shall be refunded to Buyer. There is no mention of refunding the DDF in that scenario. Can you explain the difference between the situations described in those two paragraphs?

ANSWER: Here are two similar fact situations that illustrate the difference between a material breach of the contract by Seller, and a non-satisfaction (or failure) of a condition that excuses Buyer from performing.

In the first scenario, a contract is signed, Buyer hires a home inspector, and the inspector discovers that the home’s HVAC system is not working. Buyer completes a Due Diligence Request and Agreement and requests that the HVAC system be repaired by a licensed contractor. Seller agrees. However, when Buyer conducts a final walk-through inspection, he discovers that the repairs were never made.

In the second scenario, a contract is signed, Buyer hires a home inspector and the HVAC system is found to be working properly. Buyer completes a Due Diligence Request and Agreement and requests repairs of several other items. Seller agrees and subsequently makes all of the requested repairs. Unfortunately, when Buyer conducts a final walk-through inspection, he discovers that the HVAC system is not working. When he asks Seller to fix the system, Seller refuses.

The difference between these two scenarios is that, in the second, Seller never agreed to repair the HVAC system. Therefore, while Seller’s failure to repair the HVAC system in the first scenario constitutes a material breach of contract, Seller’s refusal to repair the system in the second scenario is not.

In the second scenario, even though Seller’s refusal to fix the HVAC system is not a breach, it still gives the buyer the right to terminate the contract. Why? Because a condition in the contract has not been satisfied. Specifically, paragraph 11 of the Contract states that if the Property is not in the same or better condition at Closing as on the date of the offer, reasonable wear and tear excepted, Buyer may terminate the Contract by written notice and the EMD shall be refunded to Buyer.

In the second scenario, because Seller has not breached the contract, Buyer is not entitled to a refund of the DDF. In contrast, where there is a breach by the Seller, Buyer’s right to terminate the Contract and recover the DDF is set forth in paragraph 23(b).