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Davis v. Strazza

380 N.J. Super. 476, 882 A.2d 980 (App. Div. 2005)

CONTRACTS; MORTGAGES; CONTINGENCIES—A mortgage commitment that requires the applicant to sell an existing home is not a “firm” commitment and if a contract’s mortgage contingency provision is based on a “firm,” commitment it hasn’t been satisfied.

A residential real estate contract provided, in pertinent part, that: “[t]his agreement is contingent upon the purchaser obtaining a conventional mortgage at a prevailing rate of interest for 30 years with monthly payments based upon a 30 year payment schedule. The purchaser agrees to make immediate written application for such financing and to pay applicable original fees or points. If a written mortgage commitment is not received in thirty (30) days, or any agreed upon extensions, either party may cancel this contract.” The buyer applied for mortgage financing and received a written commitment subject to a number of terms. One required that the buyer verify “the funds available for closing and provide an executed HUD-1, or equivalent closing statement, respecting the sale of any property that is a source of such funds.” One of the buyers owned a house, and the buyer owned another. The sale of both properties was needed to provide the closing funds. After the commitment was issued, the lender advised the buyers, by letter, “that the mortgage commitment was cancelled because it was unable to verify account balances. The letter stated that properties ‘required to be sold will not be sold’ and sufficient assets were not available for closing.” The buyers sought return of their deposit but the seller refused.

According to prior case law, where a buyer “[has] not obtained a firm commitment for a mortgage loan, [it is] entitled to cancel the contract and a return of [its] deposit.” The principle is that “if a mortgage commitment includes conditions over which the borrowers have no control, the commitment is less than ‘firm.’ ... A contract requiring buyers to obtain a “firm commitment ‘is one in which the buyers intend to be bound’ only if they could secure a mortgage commitment with contingencies they had the power to fulfill.’” This meant that the contract for this particular real estate transaction “was expressly contingent upon [the buyers] obtaining mortgage financing. The agreement required [the buyers] to immediately apply for the mortgage. It also provided that either the buyers or the sellers could cancel the contract if a written mortgage commitment was not received within 30 days of the signing of the agreement. Although [the buyers] received a written mortgage commitment, it was conditioned on, among other things, the sale of their properties.” The lower court already had found that the buyers acted in good faith to sell their properties. Therefore, according to the Court, the buyers in this case “were not obligated to perform and had the right to cancel the contract.”

The seller also argued that because the buyers had failed to terminate the agreement by a particular date, they were precluded from cancelling the agreement altogether. The Appellate Division disagreed, finding that “the contract gave the parties the right to terminate in the event the buyers did not obtain their mortgage commitment within 30 days of the date of the agreement. Although [the buyers] received a mortgage commitment within the required time frame, the commitment was subject to a contingency that plainly was beyond their sole ability to fill.” Most importantly, “the contract did not expressly require that [the buyer cancel the agreement] within the 30-day period for obtaining a commitment.” The Appellate Division was “convinced that such a conclusion accord[ed] with the apparent intention of the parties to [the] agreement.”

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