Possible refund of Due Diligence Fee for wrong answer on Disclosure Statement

QUESTION: We represent the buyer on a purchase of a single family home. The buyer paid a Due Diligence Fee to theseller in the amount of $500. After inspections, it was brought to our attention that several structural changes had been made to the property without a permit. Some of the changes were extensive including removing a cathedral ceiling in the dining room and adding an office including stairs in the upper level.

The seller checked that no structural changes had been made to the property on the Property Disclosure Statement, and is not willing to have the work permitted now. The listing agent says he was not aware of any changes.

My buyer has decided to exercise her right to terminate the contract before the end of the Due Diligence Period. I know that the Due Diligence Fee is usually non-refundable, but is there an exception is a situation like this where the seller makes an inaccurate representation about the property on the Disclosure Statement?

ANSWER: That’s an interesting, tough question. First of all, it’s not clear from your question whether the structural changes were made by the seller. It’s at least possible that they were made by a previous owner and that the seller wasn’t aware that changes had been made. That’s important because the seller’s answers on the Disclosure Statement are based on the seller’s “actual knowledge.” Thus, if the seller was not actually aware that structural changes had been made to the property, a “no” answer to question #24 on the Disclosure Statement would be a correct answer.

However, assuming that the seller either made the structural changes or was aware that they had been made, the seller’s answer to question #24 would not be accurate, and in our opinion might give your buyer a basis for demanding a refund of her Due Diligence Fee. As you point out, the Due Diligence Fee is generally non-refundable unless the Contract provides otherwise or the seller is in breach of the Contract. The Disclosure Statement isn’t part of the Contract, so an inaccurate answer to a question in the Disclosure Statement wouldn’t be considered a breach of contract. However, the seller’s inaccurate answer to question #24 is arguably a material misrepresentation about the property, and the buyer may be able to argue that she reasonably relied on the seller’s answer in deciding to enter into a contract to buy the property and has suffered economic harm as a direct result. These are the makings of a misrepresentation claim that could support a demand for a refund of the buyer’s Due Diligence Fee as well as her Due Diligence costs.

If your buyer client is interested in making such a claim, you should advise her to consult with a lawyer. As always, the specific facts are critically important in assessing the strength of a possible claim, and of course there are the practical considerations of the time and expense that would be involved.