Prevailing rates, terms and conditions
Attorney Richard D. Vetstein writes today about a case regarding mortgage commitment and getting your deposits back. Here is a case where the buyer could not get a loan, but also did not get all deposits returned.
I recently came across a very interesting case from the Appeals Court, Survillo v. McDonough No. 11–P–290. Dec. 2, 2011. The case underscores how carefully attorneys must craft the mortgage contingency to protect the buyer’s deposit in case financing is approved with unexpected conditions.
The buyers submitted the standard Offer To Purchase provided it was “Not subject to the Sale of any other home.” The sellers accepted the offer. The buyers received a conditional pre-approval from a local bank for a first mortgage in the amount of $492,000. The pre-approval also stated that anticipated loan was “[n]ot based on sale of any residence.”The parties then entered into the standard form purchase and sale agreement (P & S), with the typical mortgage contingency provision for a $429,000 mortgage loan. Due to the buyers’ debt to income ratios, the lender changed the loan into a “piggyback” and with the condition that the buyers list their primary residence for sale prior to the loan closing. The buyers absolutely did not want to list and sell their residence, so they wanted out of the deal.
On the last day of the extended financing deadline, the buyers timely notified the sellers that they had “not received a loan commitment with acceptable conditions,” and attempted to back out of the agreement under the mortgage contingency provision. Ultimately, with the buyers refusing to sell their home, the bank denied the buyer’s the mortgage application based on the fact that the “borrower would be carrying three mortgage payments and the debt to income is too high.”
The sellers refused to return the deposit, and litigation over the deposit ensued. The Appeals Court ruled against the buyers who had to forfeit their deposit. The court started with the assumption that “the typical loan condition for most borrowers is to require them to sell an existing home before the new loan closes. The condition here required only that the buyers list, not sell, their home and it was accordingly not a typical condition.” The buyers argued that because the condition was unusual, it was not a “prevailing” condition within the meaning of the contingency clause of the P & S, despite the fact that the condition was more favorable to them than the standard condition. The court flat out rejected that argument, citing prior rulings that terms of a mortgage contingency presuppose that the buyers will accept commercially reasonable loan terms. If less is required, the condition becomes an option. The court also noted that the buyers failed to notified the sellers that they were unwilling to list or sell their existing home, nor did they insert a proviso to that effect into the mortgage contingency clause. Subsequent events suggested that if the buyers had timely disclosed their intentions to the bank, the loan would have been disapproved, which may well have given the buyers the shelter they sought under the mortgage contingency clause. I’m not sure who is to blame here, the buyer’s attorney or the buyers themselves. Probably both.From a legal drafting standpoint and as the court pointed out, the buyer’s attorney could have insisted on language into the mortgage contingency provision that the buyers’ financing could not be conditioned on the listing or sale of the buyers’ present residence. After all, the language was in the Offer, so it could have easily been carried over into the P&S. It also seems apparent that the buyers were not particularly up front with anyone on their insistence that they would not list and sell their current residence. If they had been more forthcoming about that perhaps they could have avoided this situation.
