WHEN BUYER FAILS TO GET A MORTGAGE COMMITMENT BECAUSE BUYER CAN'T SELL THEIR CURRENT HOME

The standard form residential contract of sale (jointly Prepared by the Real Property Section of the New York State Bar Association, the New York State Land Title Association, the Committee on Real Property Law of the Association of the Bar of the City of New York and the Committee on Real Property Law of the New York County Lawyers' Association) has a clause (if the sale is conditioned on a mortgage) which states in part:

"To the extent a Commitment is conditioned on the sale of Purchaser's current home, payment of any outstanding debt, no material adverse change in Purchaser's financial condition or any other customary conditions, Purchaser accepts the risk that such conditions may not be met;"

That clause came into issue earlier this year in Gonzalez v. CHAR & HERZBERG, LLP, 2017 NY Slip Op 30473 - NY: City Court, Civil Court 2017:

"Plaintiffs received a Mortgage Loan Commitment from loanDepot.com, LLC dated August 29, 2016 (Ex 4). The document listed conditions that had to be met prior to closing and at closing, including that Plaintiffs had to have a contract of sale executed for their current home prior to the closing.

Plaintiffs submitted a "Statement of Credit Denial, Termination or Change" dated September 1, 2016 (Exs 3 & 5) which provided that Plaintiffs application was denied, because the institution did not" . . Grant Credit to Any Applicant on the terms and conditions . . ." requested and that Plaintiffs were unable to meet the condition for sale of their current residence prior to closing.

On September 2, 2016, Plaintiffs' counsel notified Defendant that Plaintiffs' mortgage application had been denied, and requested return of their security deposit (Ex 7). Defendant responded pursuant to a letter dated September 9, 2016, stating the cancellation provision was only contingent upon a commitment letter which had been issued, and advising that they intended to proceed with the scheduled closing on or about September 10, 2016 (Ex 1). Plaintiffs' counsel responded on September 9 that no "firm" commitment has ever been issued and the commitment that was issued had conditions which could not be met. Plaintiffs' counsel again requested return of the funds or stated legal action would be instituted against Defendant as escrow agent (Ex 8).

Further correspondence between counsel ensued. Defendant alleged that the conditions in the original commitment letter could have easily been met, and that Plaintiffs "bad faith" actions resulted in the denial (Ex 9). Defendant set a closing date pursuant to a Time Is of the Essence demand for October 21, 2016 (Ex 11) and stated that failure to close would result in retention of the down payment for breach of contract."

The court held:

"Where, as here, a mortgage commitment letter is revoked after issuance Plaintiffs' right to return of the escrowed down payment turns on whether the commitment revocation and consequent failure of the transaction was attributable to bad faith on the part of the Plaintiffs (Kapur v Stiefel 264 AD2d 602). There is no evidence of any bad faith on the part of Plaintiffs in the underlying record at inquest."

NOTE - an inquest was held. That is because the defendant in this action was the attorney for the seller who was also the escrow agent. The attorney refused service and defaulted. The court awarded a judgment for the down payment plus interest and costs.