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Mortgage Contingency Clauses Revisited

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  • Posted on: Sep 1 2023

By Jonathan H. Freiberger

Frequently, individuals or entities looking to purchase real property have insufficient savings to make the purchase with cash or otherwise do not want to purchase with cash.  In such circumstances purchasers typically seek bank financing to consummate the purchase.  At the time of contract purchasers are generally required to deliver a substantial down payment.  Absent a mortgage contingency clause in the sale contract, the purchaser’s down payment would be put at risk if lenders denied the purchaser’s mortgage applications.  [Eds. Note: this Blog has previously written about mortgage contingency clauses [here] and [here].]  Thus, contracts for the purchase of real property generally provide that purchasers have a certain period of time to obtain a mortgage without risking the loss of a down payment.  “A mortgage contingency clause protects a contract vendee from being obligated to consummate the transaction in the event mortgage financing cannot be obtained in the exercise of good faith through no fault of the purchaser.”  Creighton v. Milbauer, 191 A.D.2d 162, 166 (1st Dep’t 1993) (citations omitted).  Accordingly, a “purchaser is entitled to return of the down payment where the mortgage contingency clause unequivocally provides for its return upon the purchaser’s inability to obtain a mortgage commitment within the contingency period.”  Blair v. O’Donnell, 85 A.D.3d 954 (2nd Dep’t 2011) (citation omitted).  “However, when the lender revokes the mortgage commitment after the contingency period has elapsed, the contractual provision relating to failure to obtain an initial commitment is inoperable, and the question becomes whether the lender’s revocation was attributable to any bad faith on the part of the purchaser.”  Chahlis v. Roberta Ebert Irrevocable Trust, 163 A.D.3d 623, 624 (2nd Dep’t 2018) (citations and internal quotation marks omitted).

A “mortgage contingency clause is construed to create a condition precedent to the contract of sale.”  Bunnell v. Haghighi, 661 Fed Appx 110 at 5 (2d Cir. 2016) (citation and internal quotation marks omitted).  “In the absence of waiver by the buyer, any claim that the seller is entitled to retain the down payment for failure to satisfy such a condition must be based on allegations that the buyer acted in bad faith by bringing about the failure of the condition precedent.”  Id. (Citations, internal quotation marks, brackets and ellipses omitted.)  The seller has the burden of establishing bad faith.  IdSee also, Creighton, 191 A.D.2d at 165.  Thus, in order “to enforce the purchase agreement in the absence of the financing contemplated by the mortgage contingency clause, it is incumbent upon [the seller] to establish that [the purchaser’s] failure to fulfill the condition necessary to obtaining financing was a mere pretense to avoid their obligations under the contract.”  Lindenbaum v. Royco, 165 A.D.2d 254, 260 (1st Dep’t 1991).

In circumstances where a mortgage contingency is solely for the benefit of the purchaser, it can be unilaterally waived by the purchaser, who can proceed to closing with cash, but if the clause is for the benefit of both parties, it cannot be unilaterally waived by the purchaser.  Dale Mortgage Bankers Corp. v. 877 Stewart Avenue Assoc., 133 A.D.2d 65, 66 (2nd Dep’t 1987) (citation omitted).  A mortgage contingency clause will be deemed for the benefit of the purchaser and the seller where either party has the right to cancel the contract in the event the purchaser fails to procure a mortgage commitment.  Indeed, it has been held that “unless the contract clearly states otherwise, such provisions are meant to protect the seller as well as the buyer, on the theory that the issuance of a mortgage commitment to the prospective buyer increases in direct proportion to the amount of the mortgage commitment itself, the chances that the buyer will in fact be able to perform his obligations in a timely manner.”  Ting v. Dean, 156 A.D.2d 358, 360 (2nd Dep’t 1989) (citations omitted).  Further, a purchaser can be found to be in breach where a mortgage commitment is denied, but the mortgage application is inconsistent with the nature of the loan required by the sales contract.  See, e.g., HSM Real Estate, Inc. v. Dragon, 94 A.D.3d 702 (2nd Dep’t 2012) (the purchaser applied for a $455,000 loan but the contract required the purchaser to apply for a $400,000 loan).

On August 30, 2023, the Appellate Division, Second Department, in Rivkin v. 1946 Holding Corp., addressed mortgage contingency clauses.  The plaintiff in Rivkin entered into a contract to purchase real property and delivered the requisite down payment to seller.  The mortgage contingency clause in the contract “conditioned the [purchaser’s] obligations under the contract on his ability to obtain a mortgage loan commitment within a certain period of time, and provided him with the right to cancel the contract and receive his down payment if he did not obtain such a commitment within the specified time.”  The purchaser timely obtained a loan commitment; however, it was subject to an environmental report satisfactory to the seller.  Although the purchaser’s loan commitment was extended several times by the lender while the parties were awaiting the environmental report, the lender refused to further extend the loan commitment due to the lack of a satisfactory environmental report.  The seller refused to return the purchaser’s deposit when requested.

The purchaser commenced action against the seller in which he sought a declaratory judgment that he was entitled to the return of the down payment.  The seller asserted a counterclaim for breach of contract. Both sides moved for summary judgment.  The motion court denied the purchaser’s motion and granted summary judgment to the seller.  The purchaser appealed.

After discussing the relevant caselaw, the Rivkin Court reversed the motion court’s decision and stated:

Here, the [purchaser] was entitled to the return of his down payment on the basis that the revocation of the loan commitment was not attributable to any bad faith on his part. Contrary to the [seller’s] contention, the [purchaser] did not waive his right to cancel the contract of sale. The [purchaser] established that the lender revoked the loan commitment due to delays regarding remediating environmental contamination on the property and that these delays were not attributable to the [purchaser]. In opposition, the [seller] failed to raise a triable issue of fact. Accordingly, the [purchaser] was entitled to summary judgment on his first cause of action and dismissing the counterclaims.

Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.
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