You are purchasing a property and have tendered your down payment check to the Seller’s attorney. Your contract contains a mortgage contingency clause, which provides that, among other things, your obligation under the contract as a purchaser is conditional upon you obtaining a mortgage commitment within a certain time period. The clause further states that, if the purchaser does not receive the commitment within that contingency period, the purchaser is entitled to cancel the contract and have the down payment returned to him or her.
After working with your lender to submit all the necessary documentation towards obtaining the commitment, you obtain the commitment. You learn that your employer is restructuring the company and terminating your position before the closing is set to occur. After the contingency period expires, the lender revoked the mortgage commitment. Your attorney promptly notified the Seller’s attorney, who refused to return the down payment and indicated that the Seller intended to retain the down payment pursuant to the contract. The purchaser commences a lawsuit against the seller for its breach of the contract and to recover its down payment.
Will the Court permit the purchaser’s recovery of the down payment? In this case, the answer is yes.
A mortgage contingency clause is construed to create a condition precedent to the contract of sale. Chahalis v. Roberta Ebert Irrevocable Tr., 81 N.Y.S.3d 159, 161 (2d Dept. 2018). A purchaser is entitled to recover its down payment where the mortgage contingency clause unequivocally provides for its return when the purchaser is unable to obtain it within the contingency period. When the lender revoked the commitment after the contingency period has expired, then the question becomes whether the lender’s revocation of the commitment. Id.
In this case, the Appellate Division (Second Department) agreed with the lower court, which agreed that the purchaser was entitled to the return of the down payment. The purchaser established that, as a matter of law, he was entitled to his down payment because he submitted evidence that he acted in good faith to obtain the mortgage commitment. The commitment was subject to re-verification of employment, and the revocation of the commitment was not due to any bad faith on the part of the purchaser.
When counseling purchasers who have just entered into a contract of sale which contains a mortgage contingency clause, we urge our purchaser clients to act diligently and in good faith to obtain the commitment because there are circumstances that may occur beyond their control, such as a job loss, death, or perhaps even a global pandemic. With the possibility of losing their down payment due to bad faith conduct, the purchaser must keep the seller informed (through counsel is the best way) of any changes that may arise that would impact the purchaser’s ability to obtain a mortgage. In practical terms, many sellers would like to know this information sooner rather than later so that the seller can relist the property or move on to the next offer. And as always, we urge anyone who is seeking to embark on a real estate transaction – which could be one of the greater (largest) transactions of his or her life – to consult with trusted attorneys who will educate you along the way of this process.
Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.