Duty Of Good Faith & Due Diligence in Real Estate Transactions

Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

The duty of good faith and the concept of due diligence are important in real estate transactions. In this lesson, you'll learn about each of these concepts with some illustrative examples to help along the way.

Duty of Good Faith

Tom is a licensed real estate broker who has entered into a listing agreement with Jerry to represent Jerry in the sale of his house. Larry is a landlord who has just entered into a lease with Tanya who will be renting one of Larry's residential rental units. Veronica is a property manager for a strip mall who has just inked a commercial lease for a new coffee shop. Andy has just entered into a purchase agreement to purchase a house owned by Betty. All of these real estate transactions are substantially different from each other, but each and every one of the parties to these transactions have a duty of good faith and fair dealing to each other.

Each one of our scenarios above involves a contract, and the law assumes an implied covenant (i.e., promise) of good faith and fair dealing in all contracts, which means the duty of good faith and fair dealing exists even if the contract doesn't mention it. This duty of good faith and fair dealing requires that each party to the transaction must act honesty and fairly concerning the parties' obligations under the contract. Let's look at a couple of examples to illustrate the concept.

If you recall, Tom and Jerry have entered in to a listing agreement. If Tom presents a ready, willing and able buyer that has offered to purchase Jerry's house at the list price without any condition attached, the duty of good faith and fair dealing requires that Tom accept the offer even if Tom wants to wait for the listing agreement to expire because he found another buyer on his own that won't require payment of a sales commission.

Likewise, Andy and Betty have a reciprocal duty of good faith and fair dealing concerning their purchase agreement. Let's say that Andy's inspection report uncovered a pipe leaking under the kitchen sink that will cost about $100 for a plumber to repair. Betty has offered to pay for the repair. Andy would violate his duty of good faith and fair dealing if he uses the minor leak as an excuse to back out of a deal because he found a different property he likes better.

Due Diligence

Due diligence is another important concept in real estate. Due diligence is a proper analysis and investigation undertaken before making an investment decision. In the context of a lease, renters will want to closely inspect the rental property and scrutinize the terms of the lease to ensure they are satisfactory. Purchasing real estate can require even more investigation and may include, but isn't necessarily limited to:

  • Carefully reviewing the purchase agreement to ensure the terms and conditions are acceptable
  • Making sure title to the property is good
  • Surveying the property if boundaries are uncertain
  • Having the property professionally inspected
  • Carefully reviewing financing documents, such as the promissory note and mortgage to ensure the terms are acceptable
  • Reviewing the deed to ensure it is legally valid

Sounds like a lot of complicated work, doesn't it? Fortunately, buyers don't have to go it alone. Professionals, such as real estate brokers, title agents, surveyors, property inspectors and attorneys, can all assist a buyer in performing his due diligence. Importantly, if you hire these professionals to serve as your agents to help you with your due diligence, they have a duty of care to take reasonable care in performance of their jobs.

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