REAL ESTATE TRANSACTIONS & FINANCE
Fall Semester 2015
Financing Contingencies and Drafting of Contingency Provisions
Reading Assignment: NWBF pages 113-129
1.
Suppose that Mitchell signs a contract to buy a home from Bowman, at a price of $300,000.
The contract provided that Mitchell’s obligation was “subject to the condition that Mitchell obtain
financing in the amount of $260,000, repayable in monthly installments bearing an interest rate no
greater than 6% and over a term no less than 30 years.” The provision made no reference to the
source of the financing. Mitchell applied to Landmark Bank for a loan, but was rejected. At that
point Bowman said to Mitchell, “I’ll provide you with financing in the amount of $260,000 at 6%
interest over a 30-year term.” When Mitchell refused to complete the purchase on those terms,
Bowman sued him for specific performance of the contract. Should the court enforce the agreement
against Mitchell? Does “financing” mean any type of financing?
2.
Consider the following three clauses:
a)
Buyer’s obligation is subject to the condition that Buyer obtain financing in the
amount of $260,000, repayable in monthly installments bearing an interest rate no
greater than 6% and over a term no less than 30 years. If Buyer cannot obtain such
financing, this contract shall become null and void.
b)
Buyer’s obligation is subject to the condition that Buyer obtain financing in the
amount of $260,000, repayable in monthly installments bearing an interest rate no
greater than 6% and over a term no less than 30 years. If Buyer cannot obtain such
financing, this contract shall become null and void at the option of the Buyer.
c)
Buyer’s obligation is subject to the condition that Buyer obtain financing in the
amount of $260,000, repayable in monthly installments bearing an interest rate no
greater than 6% and over a term no less than 30 years. If Buyer cannot obtain such
financing, this contract shall become null and void at the option of either party.
How are these provisions different, and why does it matter? If you were representing the Buyer,
which would you prefer, and what additions or changes (if any) would you make? If you were
representing the Seller?
3.
Litton and Uphoff sign a contract under which Litton agrees to purchase Uphoff’s home.
They signed the form contract in the Casebook (with the financing contingency as it appears on page
28), the closing is scheduled to occur on November 1, and Litton must communicate his inability
to obtain a loan by October 1 if he chooses to exercise the financing contingency. In early
September, Litton gets an e-mail from First Bank stating that his loan application has been approved.
On October 30, however, First Bank tells Litton that his loan application is rejected and that they
will not fund the loan. Is Litton bound to perform, or can he cancel the contract at this point? Why
or why not? What can Litton do to protect himself against such a risk?