New Governmental Compliance Provision in Form 2-T

QUESTION: I am the broker-in-charge of my firm, and many of my agents have come to me concerned about new paragraph 8(h) in the Offer to Purchase and Contract (Form 2-T). Why was this provision added to the form? When and how will it apply during a transaction?

ANSWER: Paragraph 8(h) has two safeguards built in that must be satisfied before a buyer may have a right to terminate for governmental noncompliance.

First, paragraph 8(h) states that the property must be “conveyed free of any material violation of law, ordinance, permit, or government regulation[.]” Black’s Law Dictionary  defines “material” as “of such nature that knowledge of the item would affect a person’s decision-making process; significant; essential.” So, for example, if the property is not  in compliance with government regulation simply because a ceiling fan was installed without a permit, paragraph 8(h) will not apply, because a reasonable person would not  find a permitting issue with a ceiling fan to be something significant or essential to their decision-making. Conversely, if the seller has finished the basement without obtaining  any permits, then paragraph 8(h) will apply, because the buyer will have significant permitting issues and potential tax exposure should they complete the purchase.

Second, paragraph 8(h) states that it will only take effect if the seller has failed to disclose any issues of governmental noncompliance prior to the Effective Date. This means  that if the seller knows, or even suspects, that the property may be in violation of a governmental regulation, the seller can simply disclose what they know about the issue  and avoid this contract provision altogether.

If a seller fails to disclose a material violation of governmental regulation prior to the Effective Date, and the violation is discovered prior to Closing, then what happens?

Paragraph 8(h) is a brand-new condition in the contract, much like paragraph 11 which provides that the property be in substantially the same or better condition at Closing as on the date of the offer. Conditions, if they are not met, do not ordinarily result in a breach of the contract, which is true of paragraph 8(h). If a material violation is discovered  after the Effective Date, the seller can either remedy the violation or decline to fix it. If the seller does not remedy the violation, the buyer can either (1) proceed and close or  (2) terminate and receive a refund of their Earnest Money and Due Diligence Fee as their sole remedy. The buyer is not entitled to reimbursement of other costs they may  have incurred in the transaction.

It is important to note that paragraph 8(h) does not survive closing, and if the buyer closes on the property, then they are accepting the property in its current condition  pursuant to paragraph 4(h).

Under the terms of the previous version of Form 2-T, even if a seller knew that their property was not in compliance with a governmental regulation, the seller generally had  no duty to disclose. However, the same could not be said of a listing agent. A property’s being in material violation of a governmental regulation is, in nearly all circumstances, a material fact the listing agent must disclose as required by the License Law. This gap between the seller’s duty and the listing agent’s duty was a significant risk management issue, where a listing agent could be accused of failing to disclose a material fact, even if they did not know, or have reason to know, of the noncompliance. It  was also a risk management issue for the buyer agent, who could be accused of failing to discover issues of governmental noncompliance for their client.

These risks were not before, and are not now, academic. Many agents and firms have had to navigate their potential liability both during and after a transaction when issues  of governmental noncompliance have surfaced and the buyer chooses to engage legal counsel to seek a remedy. Thus, the addition of paragraph 8(h) in Form 2-T, as well as the addition of paragraph 12(r) in the Exclusive Right to Sell Listing Agreement (Form 101), will help ensure the seller is making an important disclosure to their agent in  addition to assuring the buyer that their property is in compliance.

It is believed that the addition of paragraph 8(h) will benefit both agents and their clients. For further questions regarding this forms change, the Legal Hotline is available to all REALTOR® members.