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Hafals, L.L.C. v. Capital Lease Funding, L.P.

A-980-01T2 (N.J. Super. App. Div. 2003) (Unpublished)

MORTGAGES; WAIVER—A lender cannot argue that its borrower failed to close by the agreed-upon date if it doesn’t send the agreed-upon closing notice or if its actions amount to a waiver of its right to insist on the closing date.

The owner of two separate tracts of land arranged leases with a drugstore which required the owner to construct a building on each lot. The drugstore and an unrelated lender would provide the construction financing but the owner had to obtain permanent financing. The owner obtained loan commitments for each of the properties and made good faith deposits with respect to each. The commitments set a “Closing Date,” and a procedure by which the lender would send a “Closing Notice.” The commitment also provided that time would be of the essence for performance by the borrower. Relevant to the dispute, were provisions within the loan documents whereby the deposits would be returned to the borrower if closing took place, if the lender did not approve the leases or any other documents, or if closing did not occur for reasons other than the borrower’s failure to comply with the loan commitment. If the buyer failed to comply with the terms of the loan commitment, the lender was entitled to retain the deposits. Shortly before the “outside Closing Date” for the mortgage loan, the borrower, and the lender entered into an agreement where the lender would purchase one of the properties. The lender performed some due diligence investigation, and then, pursuant to its rights under the purchase contract, terminated the purchase contract. At no time, did it send a Closing Notice to the borrower with respect to the loans. In fact, at the lender’s behest, it and the borrower discussed other financing options if the property owner elected to continue holding the properties. No Closing Notice was sent even at that time and the borrower demanded return of both of its deposits. The lender responded that the borrower had failed “to comply with its obligations under the loan commitments and refused to return the deposits.” By the time of the closing dates set forth in the loan applications, neither drugstore was completed. Eventually the drugstores were built and the properties were sold to an unrelated buyer.

The lower court held that the lender was entitled to keep the deposits. The Appellate Division disagreed. It looked to the language of the commitment and recognized that there were three conditions under which the deposits were to be returned. Here, closing obviously did not occur, suggesting that the lender was within its rights to retain the deposits. At the same time, the lender “did not expressly approve the leases.” Furthermore, the lender “never triggered a closing date by sending a Closing Date Notice,” and the Court found it was difficult to conclude that the borrower refused to close. On the other hand, if both the borrower and the lender “were partially at fault for the closing not taking place, ..., then the intent of the parties as to the disposition of the deposits [was] not clear.” The Court, finding the provisions ambiguous at best and contradictory at worst, thought that parole evidence was required “to explicate the intention of the parties with respect to them.” As a result, it held that summary judgment was inappropriate. It also held that there were inferences favorable to the borrower that the lender “had waived strict compliance with the loan agreement closing dates.” It pointed to the fact that “barely after the ink was dry on the loan agreements, the parties embarked on a consensual course of dealing leading to serious consideration by [the lender] of the purchase of the properties.” Those feelings led to a fully signed agreement for one property and an exchange of drafts for the other. None of the agreements mentioned the good faith deposits should the sales agreements have gone to settlement. There was an inference that the monies would have been returned to the borrower because it was “improbable” that the borrower would have agreed to allow the lender to use the deposits to buy the property. Further, even though the closing dates were to be “time of the essence,” at the time the loan agreement was signed, it wasn’t clear how long it would take to build the buildings. Further, the lender “suggested that it was looking beyond the agreed closing dates as the time for actual closings.” Even more, the lender continued to “expend money for counsel fees and other monies on the two transactions… which suggest[ed] its continuing interest in the properties… .” After citing a number of New York and New Jersey cases as to the meaning of “waiver,” the Court held that New York law and New Jersey law were the same and that there were sufficient factual issues that could show that the lender “may have implied to [the borrower] that it was dispensing with the enforcement of the closing date… .”


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