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MORTGAGE CONTINGENCY CLAUSES

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  • Posted on: Oct 21 2019

Purchasing real estate, a new home for example, is an expensive proposition.  It is rare that a new home buyer has enough cash on hand to make the purchase.  Therefore, it is typical for such a purchaser to seek mortgage financing to fund the purchase.  For this very reason, a real estate buyer would be reluctant to enter into a contract for the purchase of real estate without the ability to cancel the contract if a lender declines the purchaser’s application for purchase money financing.  Enter the mortgage contingency clause, which is a contractual provision typically found in contracts relating to real estate transactions.

The precise language of a mortgage contingency clause can vary from contract to contract, but typically provide that a contract can be cancelled if the purchaser is unable to qualify for the type of mortgage specified in the contract.  Which combination of parties can cancel the contract and the circumstances under which a contract can be cancelled is based on the specific language of the clause.

A mortgage contingency clause does not only benefit a purchaser.  Such clauses are “also for the benefit of the seller who wants to limit the period of time in which the property is off the market.  In addition, it is reasonable to infer that the seller would prefer the guaranteed financial commitment of a bank rather than the sometime uncertain personal financial obligation of a purchaser.”  W.W.W. Associates, Inc. v. Giancontieri, 152 A.D.2d 333, 340 (2nd Dep’t 1989), reversed on other grounds, 77 N.Y.2d 157 (1990) (citation omitted).  If a “mortgage contingency clause was solely for the benefit of the … purchaser and [does] not grant the seller the option to cancel the contract in the event the purchaser failed to obtain a mortgage commitment by a specified date,” then the seller cannot cancel the contract if the buyer failed to obtain a mortgage.  Coneys v. Game, 141 A.D.2d 795 (2nd Dep’t 1988) (citation omitted).  A mortgage contingency clause will be deemed to be for the benefit of a seller when the seller has the right to cancel the contract upon the buyer’s failure to obtain a mortgage.  Grossman v. Perlman, 132 A.D.2d 522, 523 (2nd Dep’t 1987) (citation omitted).

Further, “[a] mortgage contingency clause is construed to create a condition precedent to the contract of sale [and] [t]he 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) (citations and internal quotation marks omitted).

In any event, mortgage contingency clauses are a fertile source of litigation.  As is made plain by the caselaw, courts will rely on the language of the mortgage contingency clause in question to define the parties’ rights and remedies.  Some examples of related litigation follow.

On October 16, 2019, the Second Department decided Federico v. Dolitsky.  The defendants in Federico entered into a contract to purchase a real property from the plaintiff and made a sizable down payment.  In addition:

[a] rider to the contract contained a mortgage contingency clause providing that the buyers’ obligation to purchase the subject property was contingent upon them obtaining a mortgage commitment for a conventional mortgage “in an amount not more than $292,300.00 for 25/30 years at the prevailing rate of interest.” The buyers were required to “use due diligence” in providing documentation to their institutional lender. The rider also provided that if the buyers were unable to obtain a mortgage commitment within 45 days of the execution of the contract, “the Seller may either cancel this agreement or extend this provision for an additional period of up to thirty (30) days, at the end of which, either party may cancel this agreement without any further liability to the other.”

After the mortgage application was denied, the buyer’s attorney advised the seller’s attorney, in writing, of the denial and cancelled the contract pursuant to the mortgage contingency clause.  The Federico action was commenced after the seller refused to return the down payment.  Both parties moved for summary judgment – the buyers arguing that they “properly canceled the contract upon receiving notice that their application had been denied” and the seller arguing that the “buyers’ ‘unilateral cancellation of the contract…was a willful default under the contract of sale,’” requiring the return of the down payment.

The Federico supreme court denied the buyers’ motion and granted summary judgment to the seller.  In affirming the lower court, the Second Department found the mortgage contingency clause to be “clear and unambiguous” and, therefore, under traditional rules of contract interpretation, “the intent of the parties must be found within the four corners of the contract, giving practical interpretation to the language employed and the parties’ reasonable expectations.”  (Citation and internal quotation marks omitted.)  Under the subject clause, the Second Department found, the seller “had the unilateral right to either cancel the contract or extend the mortgage contingency period for an additional 30 days.  The buyers were only entitled to cancel the contract upon the expiration of that 30-day period.”  Thus, the buyer’s cancellation of the contract immediately upon the declination of its initial application was found to be improper.

The mortgage contingency clause in Lot 57 Acquisition Corp. v. Yat Yar Equities Corp., 63 A.D.3d 1109 (2nd Dep’t 2009) [Editor’s Note: Jonathan Freiberger, Esq., prior to founding Freiberger Haber LLP, was the purchaser’s counsel in Lot 57], provided:

…In the event, however, that the Purchaser is unable to obtain [a firm mortgage commitment] by one hundred and eighty (180) days from the date Purchaser’s attorney receives a countersigned contract, and the purchaser has notified the attorney for the Seller by certified mail, return receipt requested by said date, then either party shall have the option to cancel this contract, and in which event the Purchaser’s down payment shall be refunded with interest earned thereon, if any.

The purchaser in Lot 57 still wanted the property although it did not obtain a mortgage.  Accordingly, purchaser did not notify the seller that it did not obtain the mortgage.  Thus, purchaser could not cancel the contract for that reason and would have to purchase the property for cash.  Nonetheless, Yat Yar, the seller, sent a cancellation notice.  In modifying supreme court’s denial of summary judgment in favor of purchaser and granting summary judgment in favor of purchaser, the Lot 57 Court stated:

On its renewed cross motion, Yat Yar failed to demonstrate its prima facie entitlement to judgment as a matter of law, since it did not establish the facial validity of its cancellation of a contract for the sale of the subject property pursuant to a particular contractual provision.  Specifically, although Yat Yar established that the plaintiff failed to timely procure a mortgage loan for the purchase of the subject property, Yat Yar’s right to cancel the contract pursuant to the mortgage contingency clause did not arise until the purchaser notified it by certified mail, return receipt requested, of such failure. Under these circumstances, Yat Yar’s purported cancellation of the contract, concededly before it even had knowledge of the plaintiff’s admitted failure to obtain a mortgage commitment within the period prescribed by the contract, was not valid.  Where the procedures for cancellation provided for by the contract specify conditions precedent to the right of termination, those procedures must be followed.

The plaintiff, on the other hand, made a prima facie showing of its entitlement to judgment as a matter of law on the complaint, which sought to compel specific performance of the contract, by submitting proof of the validity of the contract of sale, its performance thereunder, and that it was ready, willing, and able to proceed to closing.  In opposition, the defendant failed to raise a triable issue of fact.

(Citations omitted.)

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