Daily Development for Thursday, February 1, 2007

by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

VENDOR/PURCHASER; CONDITIONS; REPUDIATION:  A Purchasers letter conditioning the validity of a sales contract on the vendors approval of a modification to the financing condition can be construed as a notice of cancellation for failure of the condition, and, if the letter does not meet the requirements for cancellation pursuant to that condition, seller may treat it as an anticipatory repudiation of the contract. 

Smith v. Tenshore Realty LTD., 820 N.Y.S.2d 292 (A.D. 2 Dept. 2006). 

Purchaser and vendor entered into a sales contract to purchase a cooperative apartment.  The contract included a mortgage contingency provision whereby the purchaser had 20 business days to obtain a loan commitment from an institutional lender.  The buyer had up to seven business days following the expiration of the loan commitment period to cancel the contract.  The contract required that certain documentation accompany the notice of cancellation.   As is typical of New York decisions, the court tells us less than wed like to know, and does not disclose the nature of the required documentation.  Presumably it consisted of evidence that the purchaser had applied for a mortgage loan.

Prior to the expiration of the mortgage contingency period, the purchaser sent a letter requesting an extension of the mortgage contingency period of almost three weeks, and stated that if the seller did not grant the extension, thecontract shall be null and void and neither party shall have any further liability to the other=.  The purchasers letter did not include the documentation required by the sales contract for a notice of cancellation. 

The seller apparently had a better offer, and immediately responded with a notice rescinding the contract and began the process of returning the earnest money.  The very next day, the buyer, apparently unexpectedly, did obtain a loan commitment and faxed the seller telling seller to disregard the prior communication.  The sellers rescission notice had been sent by overnight courier the prior day, and was effective, of course on sending.  (Either courier or fax were permitted forms of notice.)  The seller took the position that the contract was at an end.


The New York appeals court agreed with seller, and reversed the trial courts summary judgment for the buyers.  In fact, the court indicated that the seller had an even stronger position than the one it chose to assert.  The court held that because the notice of cancellation was defective, it could be viewed as an anticipatory repudiation of the contract.  One option the seller had in response to such repudiation was to claim a rescission.  Seller also could have claimed a default and (presumably) have retained the earnest money. 

Comment 1: In New York, typically both buyer and seller is represented by counsel, and thus its a sorry tale that the buyer (if indeed it did rely on counsel) would have been undone in this manner.  The letter, quoted in the opinion, had the earmarks of a lawyer drafted notice.

Comment 2: The editor has no problem with the notice being treated as a cancellation pursuant to the financing contingency.  In light of the fact that the contingency period still had a significant time to run, however, it does strike the editor as overly technical for the court to conclude further that the notice could have been viewed as a repudiation, justifying the seller in claiming remedies for breach. 

On the other hand, if, indeed the buyers lawyer drafted the letter, apparently with ahardball attitude= designed to bludgeon the sellers into agreeing to an extension, perhaps the courts treatment of the letter as what was intended, a threat to terminate if the seller didnt cooperate, was appropriate. 

Note that the letter didnt say something like:If you cant grant the extension, well be forced with withdraw.=  Rather, it stated that the contract would automatically be null and void.  Pretty nasty.  The drafter of that letter may find a nasty attitude on the part of the buyer clients at this point.

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