Case Law Summaries

Sharpe v. Gateway Funding Diversified Mortgage Services

• Opinion Date: November 8, 2001
• Real Property Law
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CONTRACTS; INSPECTIONS—It is generally unreasonable for a home buyer to rely on a lender’s inspection, loan approval, or appraisal in lieu of obtaining an independent home inspection.

A married couple acquired a single-family house by borrowing under a Federal Housing Administration (FHA) loan. They declined to obtain a home inspection report or use an attorney, even though the house was in obvious and substantial disrepair. Presumably, the buyers relied on the fact that the house had been approved by the FHA for a loan and that all necessary municipal certificates had been obtained. After spending substantial monies on the house, the buyers filed for bankruptcy. They then brought a lawsuit. The Appellate Division addressed only the buyers’ claims of unequal bargaining power. As a matter of law, “agreements which are unconscionable as a result of the inequality of bargaining power or sharp practices are to be recognized as offensive to public policy and subject to being declared unenforceable or to other equitable adjustment or rescission.” Consequently, “[t]o successfully rescind a contract ... on the basis of unequal bargaining power, a party “must demonstrate unconscionability by showing some overreaching or imposition resulting from a bargaining disparity between the parties, or such patent unfairness in the contract that no reasonable person not acting under compulsion or out of necessity would accept the terms.” In this case, the Court held that the buyer was not forced into entering into the transaction. It found that the couple was not an inexperienced buyer “surreptitiously lured into a bad deal by unscrupulous lenders.” One of the buyers had worked in residential construction for eleven years and had a better than average understanding of it. The other buyer was experienced with FHA mortgages. The Court found that the heart of the complaint was that the buyers “declined to obtain their own home inspection attorney because they were informed that the FHA would require any necessary repairs before approving a mortgage.” Therefore, the Court felt that the buyers may have “thought that obtaining an FHA mortgage would obviate the need for their own home inspection attorney,” but that belief was not reasonably derived from the contract of sale or the mortgage process.

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