Section 3 Cases Involving Contract Contingencies

• Library: Consumer Law and Practice 2010

When a real estate sale contract has a financing contingency - making the sale conditional on the buyer's ability to obtain financing to purchase the home - the buyer has an implied obligation to take reasonable steps to secure the financing and cannot avoid liability on the sale contract by failing to seek the financing.

In Swartz v. Mann, 160 S.W.3d 411 (Mo. App. W.D. 2005), the buyer was a real estate developer who entered into a contract to purchase a group of properties. The buyer paid an earnest money deposit to the sellers. The sale contract contained the following language:

6. Buyer's Contingencies. This Agreement is contingent upon Buyer obtaining financing for the purchase of the Property, at a reasonable commercial interest rate for 90% of the sales price.

Buyer shall notify Seller in writing no later than thirty (30) days before Closing of any failure to meet this contingency, at which time this contract will terminate and Buyer shall be entitled to a refund of Buyer's deposit. If Buyer fails to notify Seller by that date then the above contingency shall be deemed to have been satisfied.

If Buyer fails to close, Buyer shall pay the title search costs for each title insurance commitment incurred by Seller.

Id. at 412.

The contract also contained a liquidated damages provision, entitling the seller, upon the buyer's breach, to retain the buyer's deposit or three percent of the purchase price, whichever was less, as liquidated damages.

The buyer sought financing from one bank and was offered financing on terms less favorable than the contract specified - 80% of the purchase price rather than 90% - which he did not accept. The buyer testified at trial that he spoke with another bank about financing, but his testimony on this point apparently was vague. The buyer did not give the sellers notice by the contract deadline that he had been unable to obtain satisfactory financing. Rather, after the deadline for sending this notice, the buyer and the seller entered into a contract addendum extending the closing date, which made no mention of the financing contingency. More than 30 days before the amended closing date, the buyer notified the seller in writing that he had been unable to obtain financing and that the contract was null and void. He demanded the return of his $25,000 earnest money deposit, which had been placed in escrow. The sale did not close, and the sellers sued for a determination that they were entitled to keep the deposit.

The trial court granted summary judgment for the buyer. The court of appeals reversed the grant of summary judgment and remanded the case for a trial on the merits. The opinion discusses the "implied covenant of good faith and fair dealing" that exists in every contract and states that this duty of good faith imposes a '"duty of reasonable diligence and good faith"' upon a buyer who signs a real estate contract containing a financing contingency. Id. at 414 (quoting Hoelscher v. Schenewerk, 804 S.W.2d 828, 830 (Mo. App. W.D. 1991)). The court states that, while the general rule is that a financing contingency in a real estate contract is for the benefit of the buyer and that the buyer's failure to obtain financing will excuse the buyer from having to perform under the contract, the rule '"presumes that the buyer's failure to obtain financing was in good faith."' Id. (quoting Howard v. Youngman, 81 S.W.3d 101, 110 (Mo. App. E.D. 2002)).

The sellers in Swartz placed in issue the buyer's substantial business experience and acumen, his prior dealings with banks, etc. The court stated that whether a buyer has exercised reasonable diligence in securing financing is a question of material fact, and in Swartz, it was a disputed issue of fact to be determined by the trier of fact. Swartz, 160 S.W.3d at 415.

Pelligreen v. Wood, 111 S.W.3d 446 (Mo. App. E.D. 2003), involved a different type of contingency provision. The sellers included in the sale contract a contingency requirement that the buyer negotiate a new lease with the existing tenant of the property. The exact...