Daily Development for Friday, March 2, 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; MORTGAGE CONTINGENCY: A mortgage commitment may contain conditions not contemplated by a purchase contract and still be sufficiently binding on the lender such as where the conditions are likely to be fulfilled. 

Watson v. Gerace, 175 Fed.Appx. 258, 2006 WL 839055 (3rd Cir. Ct. App. 2006); March 31, 2006.

A contract for the sale of an apartment required the buyer to obtain a written commitment from an established mortgage lender within 19 days after the date of the contract.  The mortgage commitment had to be in writing, and the loan described in the mortgage commitment had to meet certain criteria.  But the clause also stated, at the end, Any mortgage commitment signed by the BUYER will satisfy this mortgage contingency.

The buyers received a credit approval letter from an established mortgage lender within the prescribed time frame.  In addition to satisfying the requirements of the contract, the credit approval letter indicated that the lender could require satisfaction from the buyers of additional criteria, including the requirement that the property appraise at an appropriate level, analysis of borrowers financial status, and verification of a second mortgage of $32,000.  Apparently the second mortgage loan was to be made by the same lender making the commitment.

On the 21st day following contract execution, the sellers broker sent a copy of the letter to the seller.  The next day, the seller wrote to the buyer declaring the mortgage commitment letter unacceptable and further declaring the contract null and void.  The seller filed for a declaratory judgment to affirm that the contract was null and void, and the buyer counterclaimed for damages and specific performance.  Both sides moved for summary judgment.  The U.S. District Court granted summary judgment for the buyer and the seller appealed.

On appeal, the Court of Appeals found first that the credit approval letter satisfied the terms of the mortgage contingency clause of the contract.  Although it contained extra conditions not contemplated by the contract for sale, the District Court had found the letter to be sufficiently binding on the lender.  In the Court of Appeals opinion, the extra conditions in this case were more than likely to be fulfilled.  As to the condition of the appraisal, the court implied (without actually holding) that it was inappropriate for the seller to object on the basis that an appraisal finding might conclude that the property actually was worth less than the seller had agreed to accept as a price.  (Thats right - they said that.)

The Court also held that while buyers under New Jersey law have the right to determine whether the mortgage contingency was satisfied, a seller does not have the same right.  It reasoned that a mortgage contingency clause in a contract for sale is intended to protect the buyer, thus the right to determine the sufficiency of the commitment rests exclusively with the buyer.  The court pointed out that the language stating that any mortgage signed by the buyer would satisfy the condition demonstrated that the condition in fact was for the buyers benefit only.

As to the sellers final argument that the contract was null and void because the buyer failed to provide written notice to the seller of the credit approval letter before the deadline, the Court found that the contract language only required the buyers to obtain the mortgage commitment by the deadline.  It did not require the buyer to provide notice to the seller.  Although the seller arguably was entitled to demand proof of satisfaction of the condition, and did so, the original date for satisfaction of the condition did not apply to production of this proof, and indeed the sellers withdrew from the contract after demanding and receiving the proof.

Comment 1: The result is right, but what a wretched opinion for a federal circuit court of appeals  - written likely by a law clerk with no concept of real estate transactions - perhaps a graduate of a school that doesnt even bother to teach about them. 

The opinion first starts with the premise that a the seller did have an right to rely upon the financing clause, and then concludes that a credit approval letter subject to a variety of major uncertainties satisfied that clause.  This is ridiculous.  The seller wants to know that the major uncertainties concerning the buyers right to obtain credit have been resolved - especially the lenders review of the buyers creditworthiness and the lenders appraisal of the property.  Both things are wholly within the discretion of the lender and its appraiser.  In either case, if the facts dont support the lenders making a loan, the seller will be stuck with the property off the market for a lengthy period and no sale.  The purpose of the borrower relying on these clauses is precisely to prevent that from happening.  The opinion suggests that in fact the borrower was creditworthy.  So what?  The lender didnt say so. 

And then theres the matter of the second mortgage loan, which apparently the lender hadnt decided to make yet.  Dont get us started. 

The opinion also suggests that the seller had no reason to complain if the lender should find the value deficient.  Why the heck not?  The seller didnt warrant the value of the property.  It accepted the offer of the buyer.  If the appraisal doesnt measure up in a timely fashion, and therefore a loan is not available, the seller has a legitimate interest in withdrawing from the deal.  Remember that the buyer, not the seller, selects the lender that will appraise the property and make a decision to loan.  The seller has every interest in wanting to know that this lender is ready to make the loan.  Of course, the commitment may be subject to things changing after the commitment is made.  But that wasnt the case here.  The lender had barely begun its loan analysis.  If the seller indeed had a right to rely on the clause, the court sold the seller short here.

Comment 2: The editor, however, agrees with the court that it was inappropriate to view this clause as intended to benefit the seller.  The critical language that any loan acceptable to the borrower satisfied the condition indicated that in fact this was the buyers condition alone.  The buyer was free to waive any of the aspects of the loan described in the clause, or could rely on them to withdraw if the lender didnt commit as desired. 

But for the court to say that it is a binding article of New Jersey common law that a clause can never be viewed as protecting the interests of both buyer and seller strikes the editor, again, as unnecessary and uninformed.  The editor, always willing to criticize from an uninformed base himself, has not read the New Jersey cases relied upon by the court, but he suspects strongly that they are based upon individual analysis of individual contracts.  The law books are full of cases finding that sellers can rely on properly worded mortgage contingency clauses, and it is highly unlikely that New Jersey common law denies sellers the right to bargain for such clauses.

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