Timely disclosure of material facts to a back-up buyer

QUESTION: There was a primary contract and a back-up contract in place on one of my listings. I say “was” because I have just been informed by the primary buyer’s agent that his client is terminating the contract due to concerns over a foundation issue that was discovered during the due diligence process. I have two questions; first, do I have a duty to disclose the foundation issue to the back-up buyer since they are already under contract? Second, if the answer to the first question is yes, must I disclose the issue before sending the paperwork to the back-up buyer’s agent giving notice that the primary contract has been terminated and that the back-up contract has become primary?

ANSWER: The answer to both questions is yes, in our view. Regarding your first question, the fact that a buyer is already under contract to buy the property—whether it is a primary contract or a back-up contract—clearly doesn’t relieve a listing agent from the duty to disclose material facts about the property that the listing agent becomes aware of after the property went under contract.

As to your second question, material facts must be timely disclosed. What would be considered timely disclosure will depend on the particular circumstances. As a general proposition, material facts that a listing agent is aware of must be disclosed before the party to whom the disclosure must be made changes their position in some significant way. Typically, that would be before a prospective buyer makes an offer. In your situation, the Back-Up Contract Addendum (Form 2A1-T) gives the buyer the right to terminate the Back-Up Contract any time before receiving notice from the seller that the Back-Up Contract has become primary. In our view, the back-up buyer should have the opportunity to decide whether or not to exercise the right to terminate the Back-Up Contract due to the foundation issue, and that means you should disclose the existence of the foundation issue to the back-up buyer’s agent before the back-up buyer is officially notified that the Back-Up Contract has become primary. Failure to do so could give the back-up buyer the right to claim a refund from you and your firm of any Due Diligence Fee and other monies paid based on your omission of material fact.