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Malus v. Hager

312 N.J. Super. 483, 712 A.2d 238 (App. Div. 1998)

MORTGAGES; CONTINGENCIES—Unless the contract provides otherwise, failure of a mortgage lender to actually fund the mortgage loan is not a basis upon which a buyer can terminate a purchase contract by reason of failure to obtain a mortgage commitment.

A residential real estate contract contained a mortgage contingency provision which gave the buyers the opportunity to terminate the contract if they failed to obtain a mortgage commitment. To do so, the buyers were required to give notice to the seller within a given time. The buyers obtained a mortgage commitment within the specified period and a closing was scheduled. Four days before closing, the employment of one of the buyers was terminated. The sellers, unaware of this development and expecting to close a few days later, moved out of their home and placed their belongings in storage until they were able to complete their own relocation. Unfortunately, under the terms of the mortgage commitment, the lender reserved the right to cancel the commitment “if prior to funding, your financial condition or employment status adversely changes… .” Based upon the buyer’s loss of employment, the lender exercised its right and declined to fund the mortgage. Thereupon, the buyers sought return of their deposit, but the sellers refused to return the money. The buyers relied on a Superior Court case, Northeast Custom Homes, Inc. v. Howell, 230 N.J. Super. 296 (Law Div. 1988) which, under similar circumstances, required that the deposit be returned to the buyer. Here, however, the Appellate Division disagreed with the conclusion underlying Northeast Custom Homes that “the mortgage contingency clause [means] that not only the mortgage commitment, but also the availability at closing of the mortgage proceeds together constitute the condition precedent to the purchaser’s obligation to perform.” In the view of the Appellate Division, to permit this construction would be to place the parties in an intolerable state of limbo until the closing is finally consummated. The Court believed that, after a certain point, a contract of sale for a home should be an enforceable agreement. Further, confusion and uncertainty can only result from extending the mortgage contingency clause to the date of closing, as a matter of law. Finally, the Court said: “[i]f the parties wish to provide in their contract for an eventuality such as this, they are free to do so. We decline, however, to impose the risk of an otherwise firm deal unraveling upon an unknowing and blameless seller, leaving him with no ability to recoup his increased expenses.”


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