Is there a contract if the Earnest Money Deposit or Due Diligence Fee hasn’t been delivered?

QUESTION: My seller signed an Offer to Purchase and Contract (form 2-T) on her property yesterday. The Offer provides for an Initial Earnest Money Deposit of $2,500.00  and a Due Diligence Fee of $500.00. I promptly called the buyer agent to tell him that the buyer’s offer had been accepted and requested that he deliver the Initial EMD (to be held by my Firm) and Due Diligence Fee right away.

I received another, better offer on the property this morning, which I have presented to the seller. The seller wants to accept the second offer and thinks that since neither the  Initial EMD nor the Due Diligence Fee have been received yet, she is not bound to sell to the first buyer. The Offer to Purchase and Contract that she signed provides that the Initial EMD was to be made payable with the Offer and that the Due Diligence Fee was to be made payable by the Effective Date.

Is the seller right? What do I do?

ANSWER: The seller is incorrect in our opinion. The last two sentences of paragraph 1(d) of the Contract read as follows:

“Should Buyer fail to deliver either the Due Diligence Fee or any Initial Earnest Money Deposit by their due dates, or should any check or other funds paid by Buyer be  dishonored, for any reason, by the institution upon which the payment is drawn, Buyer shall have one (1) banking day after written notice to deliver cash, official bank check,  wire transfer or electronic transfer to the payee. In the event Buyer does not timely deliver the required funds, Seller shall have the right to terminate this Contract upon  written notice to Buyer.”

In our opinion, this wording clearly indicates that the parties intended to create a binding contract, subject to it being terminated by the seller through the use of this  mechanism if either the Due Diligence Fee or any Initial Earnest Money Deposit is not timely delivered. Thus, in our opinion, the seller is under contract with the first buyer. In  addition, note the following wording that appears immediately above the signature lines: “Unless specifically provided otherwise, Buyer’s failure to timely deliver any fee,  deposit or other payment provided for herein shall not prevent this offer from becoming a binding contract, provided that any such failure shall give Seller certain rights to  terminate the contract as described herein or as otherwise permitted by law.”

As to what you should do as listing agent, you have an ethical obligation in this situation to recommend that the seller obtain legal advice prior to her acceptance of the  second offer. See Standard of Practice 1-7 of the REALTOR® Code of Ethics. If the seller accepts the fact that she is under contract with the first buyer, consideration should  be given to notifying the buyer in writing of the seller’s intent to terminate the contract if the Initial EMD and Due Diligence Fee are not both delivered in immediately available  funds within one banking day. And, of course, the seller may also accept the second offer as a back-up contract.