Daily Development for
Tuesday, November 3, 1998

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

VENDOR/PURCHASER; CONDITIONS; FINANCING; VAGUENESS: A financing contingency to the Purchaser's obligations that omits the interest rate renders the contract too indefinite to be enforced.

Homler v. Malas, 494 S.E.2d 18 (Ga.App. 1997).

Purchaser contracted to purchase a single family residence. The contract was contingent upon Purchaser "obtaining" a loan for 80% of the purchase price to be paid in monthly installments over a term of not less than 30 years. The parties used a preprinted purchase and sale contract containing a contingency provision with spaces in which to insert, among other things, the interest rate and the monthly payment amount. The interest rate and monthly payment amount spaces were left blank. Seller sued purchaser for breaching the contract by failing to pursue his application for a loan diligently and in good faith. The court held that the interest rate for the financing contingency was an essential term that was necessary to enable the court to enforce the contract and that, without such provision, the contract was too vague and indefinite to be enforced.

Comment 1: Does this case provide, in effect, an option for the buyer? A number of cases have held that the buyer can waive the financing contingency and proceed to close even though the terms have not been met, although this is not the universal conclusion. If, here, the seller, rather than the buyer, had tried to withdraw from the contract, could the buyer have waived the benefit of the financing contingency and close the deal?

Comment 2: The editor believes that both sides have an interest in a clear and understandable financing contingency clause, that either side ought to be able to invoke it unless the contract language is clear to the contrary. Further, lawyers for sellers ought to draft the clause so that the sellers can invoke the contingency. Sellers have an interest in knowing reasonably soon that a buyer has the money to perform.

Comment 3: The case, on its face, is reasonably straightforward. If the spaces are blank, then the contract is too vague to enforce. (The court, incidentally, distinguishes Georgia authority that would uphold a clause based upon "prevailing market rate.") But what about clauses that talk about adjustable rate mortgages and set forth an interest rate but omit other critical elements of the payment arrangement? What about those that fail to mention whether loan fees are to be taken into account? Brokers drafting form home purchase agreements rarely leave all the details blank, but it is not unusual to see a contract in which all critical elements of an adjustable rate mortgage are not specified. Indeed, we still see some forms that do not even include places to put all the critical elements. For instance, in this modern day in which every lender is promoting a fifteen or twenty year mortgage, is it appropriate to assume that the finance clause is based upon a thirty year amortization? What about "teaser" rates that are very common in adjustable rate deals? Are those the rates that ought to control? The point is that if the financing clause is not extremely specific, any attempt to describe a modern "alternative mortgage instrument" that does not go into great detail is likely to be, in the final analysis, just as fatally vague as the provision in this case.

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