BUYER SEEKS RETURN OF
DOWNPAYMENT ON FAILED TRANSACTION
The plaintiff-prospective purchaser sought to recover the sum of $50,000 representing the amount of the contract deposit arising from a failed real estate transaction. The parties entered into a contract of sale with respect to plaintiff’s purchase of a Nassau County property for the sum of $1.27 million. A downpayment in the amount of $50,000 was tendered in connection with the purchase. The contract of sale contained a standard mortgage contingency provision whereby the prospective purchasers were given 45 days to obtain a mortgage commitment of $800,000.
Approximately two weeks after the execution of the contract, the prospective purchasers received a mortgage commitment in the amount of $800,000 and the seller’s attorney was advised that the plaintiff would be ready to close within 60 days. The closing did not take place because the plaintiff’s mortgage application was declined and the commitment revoked prior to closing. The reasons given for the declination included (1) insufficient assets; (2) cash reserves less than the minimal amount required for the type of loan requested; (3) loan to value ratio exceeded the maximum permitted for the program; and (4) combined loan to value ratio, amount of subordinate financing and established property value exceeded the maximum permitted for the program and type of credit requested. Notwithstanding the fact that the property was appraised at a value of $1.1 million ($175,000 less than the selling price) and the mortgage commitment was revoked, the defendant-seller refused to accept plaintiff’s proposal to reduce the purchase price by $100,000 and took the position that the purchasers were bound by the contract. Defendant’s attorney declared time to be “of the essence” and set a closing date warning that the downpayment would be retained as liquidated damages should the plaintiff fail to close. The Court determined that the seller’s attempt to declare time of the essence was ineffective inasmuch as subsequent to the date of the time of the essence letter, the seller’s attorney faxed a proposed termination of contract agreement to plaintiff’s attorney to be signed by the plaintiffs whereupon counsel represented that he would return a fully signed copy to plaintiff’s attorney along with the escrow check for $50,000 representing the release of the downpayment.
Despite the prospective purchaser’s acceptance of the termination of the contract agreement, the defendant-sellers refused to execute the agreement and return the downpayment. Instead, they retained new counsel, all of which the defendant-sellers failed to mention in their motion papers. Defendant’s new counsel attempted to resurrect the time of the essence closing date which, in the view of the Court, was ineffective given the prior written offer to terminate the contract.
In contesting the prospective purchaser’s right to the return of the downpayment, the sellers advanced several contentions which the Court held to be unavailing. This included allegations that purchasers (1) applied for an adjustable rate rather than a fixed rate mortgage in an amount greater than that stated in the contract; (2) supplied inaccurate financial information in support of their application; and (3) intentionally prevented the closing by terminating the application for financing after they had accepted the terms of the bank’s commitment.
The prospective-purchasers countered that they were entitled to cancel the contract and recoup their downpayment given that they did not breach the terms of the contract or the contingency clause. It was their allegation that the commitment was revoked through no fault of their own.
A mortgage contingency clause protects a contract vendee from being obligated to consummate the transaction in the event mortgage financing cannot be obtained in the exercise of good faith and through no fault of the purchaser ( Creighton v. Milbauer , 191 A.D.2d 162). The situation in this case did not involve the purchaser’s failure to obtain a commitment but rather one in which the commitment was revoked by the lender after the expiration of the contingency period.
The plaintiff obtained a mortgage commitment and seller’s attorney was provided with a copy of it, to which he raised no objections. A breach such as applying for a mortgage of a different kind or greater amount than that specified in the contract would justify retention of the downpayment only if it is the cause of denial of the loan and thus prevented performance of the contract. Since the $800,000 loan was rejected, in part, because of the insufficient loan to property valuation, it cannot be said that the purchaser had fault in causing the mortgage commitment to be revoked. The right of the plaintiff-purchasers to the return of their downpayment turned on whether the commitment revocation and consequent failure of the transaction was attributable to bad faith on plaintiff’s part. This was not an issue to be decided by a summary judgment motion given the issues of fact regarding whether the plaintiff acted diligently and in good faith in applying for the mortgage and whether the mortgage commitment was revoked for reasons outside the plaintiff’s control or was the plaintiff’s own actions intended to bring about the failure of the subject real estate transaction.
As long as the purchaser exerted a genuine effort to secure mortgage financing and acted in good faith, he is entitled to recover the downpayment if the mortgage is not approved through no fault of his own. Whether the commitment revocation was the result of the plaintiff’s own actions is a factual issue requiring resolution by a trier of fact. Where the existence of a factual issue is arguable or debatable, summary judgment will be denied.
Grillo v. Finch , Supreme Court, Nassau County (NYLJ April 21, 2004)
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