What happens when you breach the 2-T contract?

The most common contract form for real estate transactions in North Carolina is the Offer to Purchase and Contract (Form No. 2-T). If you opt to have an attorney draft the contract, this entire article may not apply. Due to the fact that I am an NC realtor and am provided the Form 2-T to submit offers, I can only speak of a breach of the Form 2-T.

Definition of a breach of contract

Generally speaking, a breach of contract is a failure, without legal excuse, to perform any promise contained in a contract. If your contract is prepared using the Form 2-T, a breach of the contract would be a failure by either the seller or buyer to perform a promise that is specifically made in Form 2-T.

What about a material breach?

In general, a breach of contract is considered to be “material” if it has influence or effect on the transaction that is not insubstantial. The concept of materiality is not exact and is flexible based on the circumstance. An example of a material breach of a contract by a seller may be the refusal to proceed with the sale after signing a contract or the seller’s failure to complete agreed-upon repairs.

Breach Remedies

As per paragraph 23 of the 2-T contract, titled “remedies”, it details what occurs in the event of a breach by the buyer or the seller. In addition, what occurs if legal proceedings are brought by the buyer or seller against the other to collect the earnest money deposit (EMD), the due diligence fee, or due diligence costs incurred by the buyer, and recovery of any attorneys’ fees.

I would like to highlight an interesting sentence in 23 c where it states that “the parties acknowledge and agree that the terms of this Contract with respect to entitlement to the EMD, due diligence fee, or due diligence costs each constitute “evidence of indebtedness” pursuant to N.C Gen. Stat 6-12.2”.  From my perspective as a realtor, I think the term “evidence of indebtedness” implies that the damages to either the buyer or the seller is agreed to be limited to the due diligence fee (if any), any EMD, and any due diligence costs for which one would reasonably be able to determine.

My experience with a contract breach

I represented the seller in this case who two days after the effective date of the contract decided he no longer wanted to sell his home. The buyer’s attorney contacted the seller directly claiming his client (the buyer) within 2 days of going under contract for a $600,000 home spent $170,000.

The seller offered to return the $5,000 due diligence fee but the buyer declined and claimed he would sue my seller for specific performance. Specific performance is a remedy the buyer can use to force the seller to perform the contract. The buyer then claimed he would terminate the contract if the seller paid him $170,000.

His laundry list of expenses included costs of $30,000 to have a company move him and his family from out of state as well as$60,000 for a 1-year residential lease. My seller stuck to the black and white of the 2-T contract which dictated what the buyer remedies were if there was an alleged breach of contract. In the end, the buyer settled with the seller and received a return of his due diligence fee.

Common Breaches by the Seller

The North Carolina Real Estate Commission (NCREC) considers the following breaches common for sellers:

• Failure to deliver “good title” to the property at Settlement as required by paragraph 8 (g) of Form 2-T.  A common example is the discovery of a fence encroaching onto the seller’s property from an adjoining property. Another example is the failure or refusal of a necessary party to sign the deed to the property.

• Failure to provide the buyer with reasonable access to the property through Closing including existing utilities operating at the seller’s expense.

  
  

• Failure to make any agreed-upon repairs in a good and workmanlike manner as required by paragraph 8 (n) of the Form 2-T

• Removal of an item on the list in paragraph 2 (b) of the 2-T contract that has not been excluded from the sale. Eg. a storage shed or hot tub.

Remedy for Breach by Seller

The 2-T contract outlines the following two (2) remedies available to the buyer should the seller breach the contract:

• Terminate the contract as a result of the breach and is entitled to return of both the EMD and the due diligence fee and the reasonable costs actually incurred by the buyer in connection with the buyer’s due diligence, or

• Elect to not terminate and instead treat the contract as remaining in full force and effect and seek specific performance.

Common Breaches by the Buyer

The most common breaches by a buyer include the failure to timely deliver any due diligence or initial EMD by the due date as outlined in the 2-T. Another common breach is the failure to complete the transaction by the settlement date (or for up to 14 days following the settlement date) due to the inability to obtain financing or close on an existing property.

Remedy for Breach by Buyer

As per the 2-T, in the event of a material breach of contract by a buyer, the seller will be entitled to any EMD and due diligence fee (if any) and both shall serve together as liquidated damages. The EMD and the due diligence fee serves as the seller’s sole and exclusive remedy for such breach.

What are the parties’ rights if the other party breaches the contract?

If a material breach occurs, it will discharge the other party from any further duty to fulfil its obligations under the contract. In such an event, the contract is not considered to be void but is voidable at the option of the non-breaching party.

Due Diligence Fees

In paragraph 1e of the 2-T contract, “the due diligence fee shall be non-refundable except in the event of a material breach of this contract by seller”

Delay in Settlement/Closing

If one party to the contract is ready, willing and able to close on the settlement date but the other party is not, then the delaying party is entitled to a delay in settlement within seven days of the settlement date. If after the seven-day period the delaying party is still unable to settle, then they are in breach of the contract and the non-delaying party may terminate the contract and be entitled to the remedies available in paragraph 23 of the 2-T contract.

Terminating the contract

A buyer has the right to terminate the contract up to the end of the due diligence period. The due diligence fee (if paid) will not be refundable to the buyer unless the seller has breached.  Your realtor will provide you with Form 350-T, Termination of Contract (Form 2-T) By Notice to Seller From Buyer, to terminate the contract and refund any EMD. If a buyer or seller has questions about their rights to terminate a contract, they should consult with a real estate attorney.