>Daily Development for Thursday, July 31, 2008
>by: Patrick A. Randolph, Jr.
>Elmer F. Pierson Professor of Law
>UMKC School of Law
>Of Counsel: Husch Blackwell Sanders
>Kansas City, Missouri
>dirt@umkc.edu
>
>VENDOR/PURCHASER; CONDITIONS; FINANCING CONTINGENCY; WAIVER: A buyer under a real estate contract can waive a financing contingency provision that would otherwise automatically terminate the contract by taking actions subsequent to execution of the contract which are inconsistent with such termination.

>
>Crabby's Inc. v. Hamilton, 244 S.W.3d 209  (Mo. Ct. App. 2008).
>
>Billingslys were shareholders of Crabby's, Inc. ("Seller"), which operated Crabby's restaurant in Joplin, Missouri. Seller listed the restaurant and accompanying real property for sale in 2003, and accepted an offer for $290,000 by James Hamilton, who later assigned his interest in the contract to Paragon Ventures, L.L.C. ("Buyer") The contract signed by the parties contained a clause providing that the contract was contingent upon the Buyer's ability to obtain financing at certain specified terms, including a requirement that Buyer furnish Seller a copy of an effective loan commitment within 30 days from the effective date of the contract.

>
>“. . . Buyer shall use reasonable diligence in seekng to obtain such loan or loans, and if Buyer does not furnish seller with a copy of an effective written loan commitment within 30 days from the Effective Date, then this Contract shall automatically terminate and the Earnest Money shall be returned to Buyer.”

>
>Though Buyer never furnished Seller with the loan commitment, financing arrangements were made, and the contract and closing date were extended in order to complete repair work on the property. Subsequently, Buyer sent a letter to Seller indicating its intention not to close the transaction on the grounds that (1) fixtures were removed by Seller from the property; and (2) tax liens existed on the property (these were satisfied as of the date set for closing).  Buyer failed to appear on the closing date. Seller later sold the property for $235,000, and filed suit against Buyer for breach of contract, seeking (among other costs) damages constituting the difference in the sales price agreed upon by Buyer and the price actually obtained when the property finally sold. The trial court entered a judgment in favor of Seller, and Buyer appealed.

>
>On appeal, Buyer argued that, regardless of the dispute about the fixtures, it did not breach the contract by refusing to close because the contract automatically terminated by its terms when Buyer did not furnish a copy of an effective written loan commitment as required by the financing contingency provision noted above.   Seller responded that Buyer waived the financing contingency provision by its conduct after entering into the contract.

>
>The court began its analysis by noting that financing contingency provisions protect the buyer, and as such, they are a condition of the buyer's duty. Further, a buyer "can elect to waive the contingency and proceed with the contract under the rule that a party may waive any condition of a contract in that party's favor." While the contract "automatically terminated" by its explicit terms when Buyer did not furnish Seller with an effective loan commitment within 30 days, Buyer's actions after the 30-day period expired were inconsistent with a termination. Specifically, Buyer executed two amendments to the contract which extended the closing date, as well as a rider to the contract granting the Buyer the right to take possession of the property prior to closing. Buyer accepted a key to the property, changed utilities to its own name, and obtained licensing to operate a restaurant on the property.

>
>Buyer also did in fact obtain financing, which was not on the terms specified in the contract but which was nevertheless the only loan Buyer ever applied for, and Buyer did accept it. Therefore, the court concluded that, "the only reasonable explanation possible for and consistent with Buyers' signatures on these documents is their waiver of this contract requirement and the resulting automatic termination of the contract."

>
>Comment: Obviously the requirement that the commitment be provided to seller within thirty days is designed by protect seller, so that seller can be confident that the property is sold and not have to wait until much later to discover that the buyer has no financing.  Typically  Seller should be able to waive such a condition.  But the wording of the contract appears to cancel the contract automatically upon the failure of buyer to submit a written copy of the commitment, even if the Buyer in fact obtained a commitment.

>
>The condition that buyer actually obtain a commitment, however, (rather than provide a copy to seller), also appeared in the contract, but did not contain an independent statement of when such condition expired. This condition is at least a condition protecting buyer, and also may be viewed as protecting both parties.  It probably was appropriate to consider it to be the intent of the parties that this also was a 30 day condition.

>The 30 day termination was a high risk tactic for seller.  The editor suspects that a court might not want to enforce it against buyer where buyer in fact obtained a commitment but didn’t provide the commitment to the seller within 30 days.  Further, as indicated here, where either party failed to invoke it and went ahead with preparations to close, a court is likely to view such conduct as a waiver. 

>
>Automatic forfeiture clauses are always problematic.  Generally, the editor prefers to create conditions in which a party must make an election to invoke the condition.   Although this creates the danger that the opportunity to elect the condition will be overlooked, the editor still thinks it’s a safer course. 

>
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