Every North Carolina buyer signs an Offer to Purchase and Contract that says what happens to the due diligence fee and the earnest money deposit if the deal falls apart. Most people never think about those paragraphs past the closing table. A 2022 decision from the North Carolina Supreme Court explains exactly how much weight they carry.
What happened in Reynolds-Douglass v. Terhark?
In mid-2017, a Wake County seller listed her home for $250,000. In late July, a buyer signed the standard Offer to Purchase and Contract, agreeing to pay a $2,000 due diligence fee and a $2,500 additional earnest money deposit.
Three days later, the buyer emailed the listing agent and said she would not close unless the seller cut the price by $5,500. The seller refused. The buyer never paid either the due diligence fee or the earnest money deposit, and the deal fell apart.
The seller took the buyer to small claims court over the $2,000 due diligence fee and won. The case grew from there: the seller amended her claim to include the earnest money deposit, damages for relisting the home, and attorney’s fees. The trial court awarded her $18,343.92, including $13,067.70 in attorney’s fees. The buyer appealed all the way to the state Supreme Court.
Why did the court call the contract an “evidence of indebtedness”?
North Carolina law has a general rule that each side pays its own attorney’s fees, unless a statute says otherwise. One exception is N.C.G.S. § 6-21.2, which makes attorney’s fee clauses enforceable on notes, conditional sale contracts, and “other evidence of indebtedness.”
The buyer argued that an Offer to Purchase and Contract is not an evidence of indebtedness, and that the statute was meant only for commercial debt like promissory notes. The Supreme Court disagreed.
The Court held that an Offer to Purchase and Contract is a written instrument, signed by the parties, that on its face evidences a legally enforceable obligation to pay money. That is the definition the Court set in a 1980 case, Stillwell Enterprises v. Interstate Equipment, and it applies here. The Court also confirmed that the prevailing party can collect attorney’s fees for defending the judgment on appeal, not just for the original claim.
What did the dissent argue?
Two justices dissented. Their argument: the statute’s fee formula would cap attorney’s fees at 15 percent of the outstanding balance, which here would mean 15 percent of the $2,500 earnest money deposit, or $375, not the full $13,067.70 awarded. The dissent also argued the statute was written for commercial transactions, not residential sales contracts.
The majority rejected both points. Nothing in the statute limits it to commercial deals, and the contract’s own language authorized reasonable attorney’s fees for the prevailing party in a proceeding to recover the earnest money deposit.
What does this mean for Northeastern NC buyers?
The practical lesson is straightforward: the paragraphs in your Offer to Purchase are enforceable, and they can be expensive.
The due diligence fee is non-refundable once the contract is effective. It buys you the right to walk away for any reason during the due diligence period, but the fee stays with the seller either way.
The earnest money deposit is different. It is held in escrow as a sign of good faith, and if you breach the contract, the seller may be entitled to keep it as liquidated damages. Under this ruling, if the seller has to sue to recover that deposit, the prevailing party’s attorney’s fee clause in the contract is enforceable. That means a buyer who walks away after the due diligence period without a contractual out can face not just the loss of the deposit, but a bill for the seller’s reasonable attorney’s fees.
This cuts both ways. Sellers who hold a signed contract and a buyer who refuses to close have a real remedy, and this decision tells them the attorney’s fee clause is worth more than a line of fine print.
The bottom line
Read the contract before you sign it, and know which fees are at risk if the deal falls through. The due diligence period is the time to do your inspections, your financing work, and your second-guessing. Once you let it expire and the contract is firm, walking away can cost you the deposit, the fees, and the other side’s legal bill on top.
If you are in a dispute over a contract, a North Carolina real estate attorney is the right person to talk to. This article explains what the court decided, not what any particular contract says, and every contract should be reviewed by a lawyer before you sign it.
