Due Diligence Fees: How and when must they be delivered?

One of the most important documents in a residential real estate sales transaction is the sales contract between the buyer and the seller.  The sales contract details the parties’ agreement, including terms such as price, closing date, warranties, etc.  The North Carolina Statute of Frauds requires real estate sales contracts to be in writing and signed by the parties in order to be enforceable between the parties.  The Standard Form 2-T, Offer to Purchase and Contract, jointly approved by the NC Bar Association and NC Association of REALTORS®, Inc., is a commonly-used sales contract form in residential transactions involving real estate brokers. 

Standard Form 2-T includes a provision for a “Due Diligence Fee,” which is defined as follows:

“A negotiated amount, if any, paid by Buyer to Seller with this Contract for Buyer’s right to terminate the Contract for any reason or no reason during the Due Diligence Period. It shall be the property of Seller upon the Effective Date and shall be a credit to Buyer at Closing. The Due Diligence Fee shall be non-refundable except in the event of a material breach of this Contract by Seller, or if this Contract is terminated under Paragraph 8(n) or as otherwise provided in any addendum hereto.”

In other words, this fee is intended to compensate the seller for the Due Diligence period, during which the buyer may decide whether to proceed with the transaction.  The buyer will receive a credit for the fee at closing.  However, if the contract terminates prior to closing, the buyer forfeits the fee, unless the seller has breached the contract.

When must the fee be delivered?  Provision 1(d) of Standard Form 2-T dictates that the Due Diligence Fee must be “made payable and delivered to the Seller by Effective Date” of the contract.  In other words, the buyer must pay the Due Diligence Fee directly to the seller at the time of contract acceptance. 

How may a buyer transmit the Due Diligence Fee to the seller?  Provision 1(d) of Standard Form 2-T allows a fee to be paid by cash, official bank check, wire transfer, or electronic transfer.  Thus, it is ideal for the buyer to send the fee directly to the seller via personal delivery, postal mail, wire transmission, or other electronic means. 

What if the buyer delivers the Due Diligence Fee to a broker, rather than directly to the seller?  Commission Rule 58A .0116(b)(4) dictates:

“A broker may accept custody of a check or other negotiable instrument made payable to the seller of real property as payment for an option or due diligence fee, or to the designated escrow agent in a sales transaction, but only for the purpose of delivering the instrument to the seller or designated escrow agent. While the instrument is in the custody of the broker, the broker shall, according to the instructions of the buyer, either deliver it to the named payee or return it to the buyer. The broker shall safeguard the instrument and be responsible to the parties on the instrument for its safe delivery as required by this Rule. A broker shall not retain an instrument for more than three business days after the acceptance of the option or other sales contract.”

In short, if a buyer delivers the Due Diligence Fee to a broker, the broker must safeguard the fee and ensure that it is safely and promptly delivered to the seller.  The broker must deliver the fee no later than three business days after contract acceptance. 

Standard Form 2T includes two acknowledgements related to delivery of the Due Diligence Fee. The listing broker acknowledges receipt of the Due Diligence Fee using the Listing Agent Acknowledgement of Receipt of Due Diligence Fee. The listing broker should not sign an acknowledgement of receipt of funds when the buyer has submitted the fee directly to the seller. The seller may acknowledge receipt of the fee using the Seller Acknowledgement of Receipt of Due Diligence Fee.