by Phoenix attorney Christopher A. Combs, partner with Combs Law Group, P.C.

Question: Our partnership is selling eighty acres of land near Florence. The buyer paid a $100,000 earnest money deposit and had a sixty-day “due diligence” period to conduct all inspections relating to the property. The sixty-day period has passed, and escrow is scheduled to close. The buyer’s environmental consultant now says that, due to the use of pesticides in farming operations years ago, there will be extensive clean-up costs. We were unaware of the use of pesticides in any prior farming operations by previous owners. As a result of the pesticide contamination, the buyer is demanding the return of his $100,000 earnest money. We have told the buyer that the buyer had sixty days to complete all inspections of the property, and that we are entitled to at least keep the $100,000 earnest money. Can we keep the $100,000 earnest money?

Answer: Probably. The general rule is that, if there is an inspection period for a buyer to conduct his “due diligence” to determine the feasibility of buying the property, the buyer cannot cancel the contract for a problem that the buyer should have discovered during the inspection period. Therefore, in Arizona you should be able to pursue any remedies available under the contract for default of the buyer, including the remedy of keeping the $100,000 earnest money. Note: The law in this area is not entirely clear. For example, the Ohio Supreme Court has ruled that, even though the buyer did not discover a flood plain problem during the inspection period, the buyer was entitled to rescind the transaction upon discovery. The reasoning was that the buyer was not negligent in failing to discover the flood plain problem, and that the seller and the buyer were acting under a mutual mistake of fact regarding the existence of a flood plain problem. 632 N.E.2d 507 (1994).

 

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