“Contingencies”
• Often, buyer’s obligation under K is expressly dependent
on certain conditions, e.g.,
– Buyer must qualify for mortgage financing
– Buyer must receive satisfactory inspection
– Title report must show seller’s title meets agreed standard (e.g.,
“marketable title” or “insurable title”)
• Often, are expressed as conditions precedent or
“contingencies” (buyer has no obligation unless/until
condition is satisfied)
Financing Contingency
• Contingency would permit Uphoff to escape K if an
unknown, unexpected problem causes the lender to
refuse his loan application
– E.g., land appraises for too low of a value relative to contract
price (bad loan-to-value ratio, e.g., Johnston v. Curtis, p. 31)
– E.g., land has some other problem lender won’t accept (such
as a title problem, a zoning problem, a termite problem, or
some other problem revealed by lender’s investigation)
• Uphoff wants to buy a home
• Before starting to look, he goes to First
Bank, which “prequalifies” him for a
loan up to $350K (based on his
income and his credit history)
• Uphoff says: “Since I’m prequalified, I
don’t need to include a financing
contingency in any contract I sign”
• How would you respond?
• Mitchell signs contract to buy home from
Bowman for $300K
– K: Mitchell’s obligation contingent upon
obtaining financing at rate not to exceed 6%
for a term not less than 30 years
– Mitchell is turned down by bank
– Bowman then agrees to provide Mitchell
with financing for 30 years at 6%
• Can Mitchell refuse to perform, or must
Mitchell accept seller financing?
Financing
Problem 1
Seller Financing?
• Most courts: Buyer need not accept seller financing unless K
expressly requires Buyer to accept it [e.g., Barber v. Jacobs, 753
A.2d 430 (Conn. Ct. App. 2000)]
Seller v. Institutional Financing
• Institutional lenders typically will not act as quickly to
proceed to foreclosure in event of default
– Reasonable buyer would expect institutional financing (bank, S&L,
credit union, etc.)
– This protects buyer against numerous risks: (a) low appaisal; (b)
buyer can’t afford loan; (c) title/land use problems; (d) lender’s
enforcement policies
– E.g., Citi or Wells Fargo is better positioned to “give borrower
time” (may make greater effort to keep the loan out of
“nonperforming” category”)
– By contrast, Bowman (not in the business of providing loans)
may feel compelled to begin immediate enforcement
Financing Contingency: Pitfalls
Background Hypo for Problem 2
• Form Ks typically include some financing contingency, but
they aren’t always optimal or sufficiently precise
– E.g., Johnston v. Curtis (p. 31): buyer didn’t fill in blanks for
maximum loan term and maximum interest rate (and thus court
required buyer to accept “reasonable” financing at rate buyer did
not subjectively want)
– E.g., institutional financing only? How many loan applications?
– Can contingency be waived? By who? Can contract be assigned?
• Buyer/Seller sign contract for sale: price = $300,000, subject to
financing contingency (for a loan of $260,000)
• Buyer’s loan app is rejected by 2 banks
• Seller has a $320,000 “back-up” offer from Trump
• Gates pays Buyer $5,000 to assign her rights as Buyer under the
contract to Gates (who can pay in cash and doesn’t need a loan)
• Can Seller cancel the contract and sell the land to Trump, or can
Gates enforce the contract?
Problem 2
• Compare these three contingency provisions:
• A: “If financing cannot be obtained, this contract shall be
null and void.”
• B: “If financing cannot be obtained, this contract shall be
null and void at the option of the buyer.”
• C: “If financing cannot be obtained, this contract shall be
null and void at the option of buyer or seller.”
• A contingency can typically be waived only by the party
whom it benefits
– If a contingency benefits both parties (Condition C), Buyer
can’t waive it and compel the Seller to perform
– If contingency expressly benefits only Buyer (Condition B),
Buyer can waive it, and could compel Seller to perform
• Does Condition A benefit only Buyer? Or both Buyer and
Seller?
Conditions Precedent and
Conditions Subsequent
• Condition A: condition precedent (Buyer doesn’t become
bound until Buyer obtains financing)
• Condition B/C: condition subsequent (Buyer is
conditionally bound; but, Buyer (in B) and/or Seller (in C)
can take steps to terminate K, if Buyer does not obtain
financing)
• Generally speaking, the buyer’s equitable rights under the
contract are assignable, unless the contract provides
otherwise
• Thus, Gates can enforce the contract, unless the court
decides that Seller had the right to terminate the contract
based on Buyer’s failure to obtain financing
• Question: Does contract allow either Seller or Buyer to
terminate if Buyer can’t get financing? Or does it allow
only Seller to terminate?
• In example C, financing contingency expressly protects
both parties and allows Seller to terminate
• In example B, financing contingency expressly protects
only the Buyer; Gates may enforce K
• Example A?
– Most courts hold financing contingency protects the Buyer
unless the contingency expressly protects the Seller
– If Seller wants right to cancel if Buyer doesn’t get financing,
Seller must be explicit
• Contingency on p. 28 requires Buyer (Litton) to give
notice to terminate by indicated date (in this Problem,
October 1)
– If no notice to terminate is given by the Buyer by that date,
then “this condition shall be deemed satisfied”
– Here, no notice was given (b/c Litton had gotten preliminary
approval and expected he would get the loan)
• Who should bear risk in this situation (late withdrawal of
financing approval): Seller (Uphoff) or Buyer (Litton)?
Problem 3
• Litton contracts to buy Uphoff’s home, signing form K on
page 28; sale to close Nov. 1
– Litton can cancel before Oct. 1 if he can’t get financing by then
• September: Litton gets loan approval
• October 30: Bank discovers a termite problem and
refuses to fund the loan
• Can Litton cancel at this point, or must he perform?
Note 1, pages 115-116
• If Buyer’s obligation is contingent on getting a loan
commitment, and Buyer gets a commitment but it is later
withdrawn, most courts hold contingency is satisfied and
Buyer must perform!
• In this situation, prudent buyer should insist that buyer’s
obligation is contingent on actually obtaining loan
(“funding”), not just on obtaining a loan commitment