Daily Development for Monday, June 4, 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
dirt@umkc.edu

VENDOR/PURCHASER; CONDITIONS; MORTGAGE CONTINGENCY: Where a mortgage contingency states that it is deemed satisfied unless invoked before a date certain, but there is no time of essence clause in the contract, the seller has a duty to be reasonable in considering whether to grant an extension of that date.   

Jaramillo v. Case, 100 Conn. App. 815 (2007)

Buyer offered to purchase property contingent upon his obtaining of a first mortgage from an accredited mortgage company in the amount of $1.556 million.  The offer did not specify a date by which the buyer was to obtain the mortgage, as the offeror anticipated that a more formal contract would be executed later if the offer was accepted.  Buyer represented that he was prequalified.  The sellers accepted the offer and a formal contract of sale ultimately was executed.  As attorneys were involved, however, the execution of the contract occurred some time after the actual acceptance of the offer.   

In accepting this offer, sellers turned down another lower offer for full cash (contingent on inspection).  Those offerors apparently remainedback ups to this contract, even to the time that litigation ensued on it.

During the course of negotiations over an issue concerning the roof, seller informed the buyer that he would be making irrevocable arrangements concerning the caretaker of the property (it was a $1.8 million vacation place. . . sigh. . . ) and that the sellers were counting on the buyers commitment to proceed.  The contract was executed shortly thereafter, calling for satisfaction of the financing contingency within about two weeks - on November 5.  The contingency stated that if the buyer did not invoke the contingency by 5 PM on the date set, it was deemed satisfied.  If the buyer did invoke it, the contract was cancelled and the buyers earnest money would be refunded.  Aside from these specified dates, and a specified closing date two months later, there was no general time of essence clause. 

Buyers appraiser looked at the property on November 1, but needed more information.  He contacted sellers attorney, who was on vacation, and , instead of seeking an alternative source of the information he needed, just waited for a return call.  On November 4, buyers asked for an extension of the mortgage contingency until November 12.  Sellers countered that they would extend to November 9, and further if there were satisfactory explanations of the need for further delay.  Seller had a discussion with Buyers attorney in which he discovered the fact that the lender was reviewing tax returns and other issues, but the discussion became heated and was not concluded with full understanding or resolution.

On November 9, Buyer asked for a further extension, and indicated that the reason was that the mortgagee was reviewing the Buyers income tax filings.  By this time it was probably two months since Buyer had indicated in his original offer that he was prequalified.   The extension request indicated that if Seller did not agree to the extension, Buyer would have no choice but to ask for a refund of the earnest money.  Sellers refused to grant the extension.  Buyers lawyer responded that he deemed the refusalunreasonable because the delay was due to the problem in getting appraisal information.   Sellers then contracted to sell the property to the back up buyers for a price just a bit lower than Buyers offer (perhaps some was eaten by brokers) and without a mortgage contingency. 

Two days later, within the time period of the requested (but denied) extension, Buyers lender approved the mortgage.   The commitment was slightly lower than the amount specified in the contract and had further conditions - such as a certification from Buyers accountant that the payment obligations would have no adverse impact on his business and, perhaps even more significant, and contract of sale on Buyers current residence, which was not yet on the market.  Sellers refused to proceed with Buyer.  (The parties later disputed whether this was areal condition, but in any event it was after the Sellers contested decision to deny further extensions. On November 30, Buyer waived the contingency and demonstrated the financial ability to close.  But by then Sellers were committed to sell to theback up buyers for cash. 

Buyer brought suit for specific performance, with a lis pendens.  Sellers proceeded to close with theback up buyers subject to a litigation contingency. 

The trial court found for sellers and the Buyer, apparently flush with litigation money, at least - appealed.  On appeal, Buyer argued that, as there was notime of essence agreement, the seller had a duty to be reasonable in agreeing to extensions.  Buyer contended that the trial court had applied a subjective, rather than an objective, standard in determining that Sellers had been reasonable, as the trial court had stated that the Buyers had acted out of perceived necessity rather than malevolence.  Sellers had already purchased a replacement vacation home and were uncomfortable carrying two mortgages.  Further, as they had dismissed their caretaker, they were concerned about closing before the onset of winter. 

The appeals court affirmed, on the basis that the seller had been reasonable.  Seller had communicated to the Seller at least some of the concerns leading it to desire an early closing.  Buyer had been vague about why the extensions were needed, and, the court held, any seller would be suspicious if a seller had indicated eight weeks before that it was prequalified and now the lender was demanding to inspect tax returns.  

Editors Comment 1: Certainly the right result.  And the right focus on the objective reasonableness of the Sellers decision as of the time of the decision.  But the Connecticut lawyer who sent this in is concerned about the courts statement that the seller does not have an absolute right to refuse to extend a mortgage contingency written in this way.   Here is that analysis:

Reporters Comment: [This decision is] certainly alarming from a seller's perspective, as it focuses not on whether the buyer got his mortgage within a reasonable time of the specified date (no time-of-the-essence clause in the contract), but rather on the reasonableness of the seller's rejection of a request for an extension. It is news to me that the seller is under some duty to entertain any request for an extension in the time within which a buyer might get his mortgage. Notice that in this case the buyer was careful not to waive the contingency in the face of the sellers' rejection of the extension request; rather, the buyer sought to preserve his right to terminate the contract.

I thought a seller could decline such a request for any reason or for no reason. By turning down the request, the seller of course runs the risk that the buyer gets the mortgage within a reasonable time after the specified date and demands that the seller perform; a threat to do so might chill efforts to line up another buyer. Apart from this risk - especially difficult to gauge here because Connecticut cases offer no practical guidance on the question of how soon after the contracted-for date is soon enough the sellers should be free to walk, unless the buyer expressly waives the contingency.

Editors Comment 2: In light of the way that the clause is worded here I dont think that it is possible for a late mortgage commitment to satisfy the clause, because it is deemed waived if the buyer doesnt invoke it, and therefore any subsequent granting of a mortgage commitment, although useful to the buyer, has no contractual meaning. 

But is it appropriate to argue generally that the seller has no duty to extend?  The editor is of the view that the seller should not have the duty to extend, as this is not the sort f clause to which time of the essence rules ought to apply.  In the particular case, however, the seller implicitly agreed to be reasonable in considering further extensions, and as a consequence the buyer did not withdraw from the contract, thus providing consideration for that consent, if any was required.   (Probably no consideration is required for this sort of modification of an existing contract. )

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