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Purchasers Should Take Mortgage Contingency Clauses Literally

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  • Posted on: Jul 17 2020

This Blog has previously addressed issues concerning mortgage contingency clauses.  [HERE]  Briefly stated, mortgage contingency clauses in contracts for the sale of real property make the sale contingent on the purchaser obtaining a purchase money mortgage consistent with the clause’s requirements.  The failure to obtain a mortgage commitment after a diligent effort to do so, permits the potential purchaser to cancel the contract and demand the return of a down payment without being in breach of that contract.  See, e.g., Schramm v. Solow, 91 A.D.3d 624, 626 (2nd Dep’t 2012) (citations omitted) (“the buyer met her burden of establishing her prima facie entitlement to judgment as a matter of law by tendering evidence in admissible form that she attempted to secure a mortgage loan, but was unable to obtain the requisite firm commitment as required by the terms of the mortgage contingency clause of the contract and, thus, was entitled to recover her 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).  A purchaser has “an obligation under [a] mortgage contingency clause to make a diligent, prompt, and truthful application to a bona fide lending institution for a mortgage.”  Big Apple Meat Market, Inc. v. Frankel, 276 A.D.2d 657, 659 (2nd Dep’t 2000) (citations and internal quotation marks omitted).  

In many cases a “mortgage contingency clause [is] a condition precedent inuring to the benefit of both parties, and therefore [cannot] be waived unilaterally by the [purchaser].”  Degree Security Systems, Inc. v. F.A.B. Land Corp., 17 A.D.3d 402, 403 (2nd Dep’t 2005) (citation omitted).  Indeed, “unless the contract clearly states otherwise, [mortgage contingency] 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).

If a purchaser seeks a mortgage commitment that is inconsistent with the mortgage contingency clause, the failure to procure a commitment will not provide purchaser with grounds to cancel the contract and have the down payment returned.  For example, the mortgage contingency clause in Post v. Mengoni, 198 A.D.2d 487 (2nd Dep’t 1993), required purchaser to obtain a $2,000,000 mortgage commitment.  Purchaser was deemed to be in breach of the contract, and was not entitled to the return of his down payment, because his application for a mortgage in the amount of $2,100,000 was denied.  InKweku v. Thomas, 144 A.D.3d 1109 (2nd Dep’t 2016), the Court dismissed purchaser’s complaint for the return of a down payment because “[a]ll three of the buyer’s successive mortgage loan applications indicate that he applied for a loan in an amount that exceeded the $625,950 amount set forth in the mortgage contingency clause [and, accordingly b]y applying for a mortgage in an amount greater than that stated in the contract, the buyer breached the contract, as a matter of law.”  Kweku, 144 A.D.3d at 1111 (citations omitted).  The Kweku Court also found purchaser in breach by applying for an “FHA” mortgage loan when such a loan was prohibited by the contract.  Kweku, 144 A.D.3d at 1111

Needless to say, mortgage contingency clauses give rise to a significant amount of litigation.  On July 15, 2020, the Appellate Division, Second Department, decided Bigfoot Media Properties, LLC v. Cushman In T, LLC, a case in which the Court was called upon to interpret a mortgage contingency clause.  The defendant in Bigfoot was the owner of a single-family house (the “Property”).  Plaintiff limited liability company, as purchaser, entered into a contract to purchase the Property from defendant.  The purchase price for the Property was $3,150,000 and plaintiff made a $200,000 down payment (the “Down Payment”) at the time the contract was executed.  The Down Payment was deposited into the escrow account of defendant’s attorney.

The subject contract “contained a mortgage contingency clause that provided that the plaintiff shall make a prompt application for a ‘conventional’ 30-year mortgage loan in the sum of $2,000,000, and that the plaintiff would be entitled to cancel the contract and receive a refund of the down payment plus accrued interest in the event that the application was denied.”  Plaintiff, however, never applied for a loan.  “Instead, Jeffrey Gerson, the sole member of the plaintiff, applied to Wells Fargo Bank, N.A…., for a $2,000,000 mortgage loan for himself, submitting his own personal financial information rather than the financial information of the plaintiff.”  Because the Property was being purchased as “investment property” and was appraised at $3,000,000, the bank issued a commitment letter approving a mortgage loan in the amount of $1,950,000.  Defendant’s offer to loan plaintiff an additional $50,000 on the same terms as the bank’s loan was rejected by Plaintiff.  Based on the bank’s appraisal (which was $150,000 less than the purchase price), plaintiff tried to cancel the transaction and demand the return of the Down payment, which request defendant refused.

Plaintiff commenced the underlying action for the return of the Down Payment.  The motion court denied plaintiff’s motion for summary judgment and granted defendant’s cross-motion for the same relief.  The Second Department affirmed the motion court’s order and remitted the matter for the “entry of a judgment, inter alia, declaring that the defendant is entitled to retain the down payment.” (Citation omitted).  The Court found that plaintiff “breached the contract without lawful excuse by failing to apply for a mortgage loan.”  (Citation omitted.)  The Court agreed that the application for a mortgage loan by plaintiff’s sole member “on his own behalf” “did not satisfy the plaintiff’s obligation, as a limited liability company is a separate legal entity from its members.”  (Citation and internal quotation marks omitted.)

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