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Nixon v. Hettling

A-5091-09T3 (N.J. Super. App. Div. 2011) (Unpublished)

CONTRACTS; DEFAULT — Even though a prospective buyer may have the right to terminate a contract if its seller does not satisfy all of the conditions in their contract, the seller may have a claim against the buyer if the buyer’s actions caused the seller to expend more money than would have been expended had the buyer fulfilled its obligations under the same contract.

Buyers contracted to buy a house, agreeing to pay a deposit and to apply for a thirty-year conventional mortgage to pay the balance of the purchase price. The buyers obtained an appraisal of the property, and requested an inspection of the septic system and of the home, and had radon level tests done. From the inspections, the buyers discovered that the septic system was functional but there were no permits for the newer portion of the system; ten items of the home needed repairs and remediation; and a radon remediation system was required with re-testing necessary before closing. The appraiser valued the house below the contract price; therefore, the mortgage application was denied. The buyers notified the seller they had not yet obtained a mortgage commitment and considered the mortgage contingency deadline to be extended unless the seller objected in writing. The seller never objected, but the buyers thereafter took no action to obtain a mortgage. Rather, the buyers demanded that the seller make the needed repairs and extend the closing date to negotiate the home inspection issues.

The seller complied with some, but not all of the buyer’s demands. He paid for a radon reduction and monitoring system and agreed to another radon test before the closing. This resulted in an acceptable reading. The seller hired a firm to evaluate the septic system and make it compliant with all regulations. He also retained a plumber to make repairs. After the seller undertook repair and remediation efforts, the buyers canceled the contract and demanded return of their deposit. The buyers contended that the contract was null and void because they were unable to obtain a mortgage commitment and because the seller had refused to make all of the repairs. The buyers also argued that the seller failed to obtain permits and approvals for his past work to the septic system, and was unable to provide as-built plans and permits for the newer part of that system; did not provide a working septic system; could not convey clear and marketable title; and could not show that the water supply met applicable standards. The seller rejected the buyers’ reasons for canceling the contract, notified the buyers that they should continue to seek financing, indicated that he was ready, willing, and able to close, and set a time of the essence closing date. The buyers remained unwilling to proceed, contending additionally that the seller misrepresented that he had obtained all necessary permits for the septic system; could convey clear title; and that the septic system was located within the property’s boundaries.

The buyers sued, alleging breach of contract and seeking damages. The seller filed a counter-claim alleging, among other things, breach of the covenant of good faith and fair dealing. The parties then cross-moved for summary judgment. The lower court conducted oral argument and issued an oral and written opinion the same day. It found that although the seller had expended substantial resources for radon remediation and modifications to the septic system, the seller had refused to make all the repairs. Even though the remaining items were minor physical defects, the lower court held that under the language of the contract the buyers had the right to rescind. In a written opinion, the lower court also held that the buyers were entitled to summary judgment and a return of their deposit because the seller materially misrepresented, in violation of the “Necessary Licenses Clause” of the contract, that he possessed licenses, permits, and final approvals for all work done on the septic system; refused to comply with the “Home Inspection Clause” and remedy all physical defects identified in the inspection report; and failed to meet the applicable statutory water standards required by the “Water Testing Clause.” It found a genuine issue of material fact as to whether the buyers attempted to secure a conventional mortgage, and whether the buyers’ efforts to obtain a mortgage were in good faith. After the court refused to stay its rulings pending appeal, the parties filed cross-appeals.

On appeal, the Appellate Division agreed that the buyers were entitled to rescind the contract as a matter of law. The seller violated the “Necessary Licenses Clause” of the contract because he did not receive a certification of compliance for the septic system until approximately four months after the buyers had repudiated the contract. Second, the seller violated the “Home Inspection Clause” because there were physical defects that the seller wouldn’t remedy. Finally, the seller breached the “Well Inspection Clause” when he failed to furnish satisfactory water test results.

However, reversing in part, the Court found that the lower court erred in dismissing the seller’s counterclaim for breach of the implied covenant of good faith and fair dealing. Having found that there was a genuine issue of material fact concerning whether the buyers attempted to secure a conventional mortgage and whether the buyers’ efforts were in good faith, the lower court had erroneously dismissed the seller’s counterclaim. The seller incurred substantial expenses to remediate the premises even though the buyers had made no effort to secure financing after denial of their one application. Giving the seller all favorable inferences, had the buyers canceled the contract before the seller had made significant repairs, the seller might not have incurred remediation expenses and could have re-listed the home “as is.”

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