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Watson v. Gerace

2006 WL 839055 (U.S. Ct. of App. 3rd Cir. 2006) (Unpublished)

CONTRACTS; MORTGAGES; CONTINGENCIES—A mortgage commitment may contain conditions not contemplated by a purchase contract and still be sufficiently binding on the lender such as where the conditions are likely to be fulfilled.

A contract for the sale of an apartment required the buyer to obtain a written commitment from an established mortgage lender within 19 days after the date of the contract. The mortgage commitment had to be in writing, and the loan described in the mortgage commitment had to meet certain criteria. The buyers received a credit approval letter from an established mortgage lender within the prescribed time frame. In addition to satisfying the requirements of the contract, the credit approval letter indicated that the lender could require satisfaction from the buyers of additional criteria. On the 21st day following contract execution, the sellers’ broker sent a copy of the letter to the seller. The next day, the seller wrote to the buyer declaring the mortgage commitment letter unacceptable and further declaring the contract null and void. The seller filed for a declaratory judgment to affirm that the contract was null and void, and the buyer counterclaimed for damages and specific performance. Both sides moved for summary judgment. The U.S. District Court granted summary judgment for the buyer and the seller appealed.

On appeal, the Court of Appeals found that the credit approval letter satisfied the terms of the mortgage contingency clause of the contract. Although it contained extra conditions not contemplated by the contract for sale, the District Court had found the letter to be sufficiently binding on the lender. In the Court of Appeal’s opinion, the extra conditions in this case were more than likely to be fulfilled. The Court also held that while buyers under New Jersey law have the right to determine whether the mortgage contingency was satisfied, a seller does not have the same right. It reasoned that a mortgage contingency clause in a contract for sale is intended to protect the buyer, thus the right to determine the sufficiency of the commitment rests exclusively with the buyer. As to the seller’s final argument that the contract was null and void because the buyer failed to provide written notice to the seller of the credit approval letter before the deadline, the Court found that the contract language only required the buyers to obtain the mortgage commitment by the deadline. It did not require the buyer to provide notice to the seller.


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