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Gallo on The Mortgage Contingency Clause (2013).

posted Sep 23, 2013, 5:38 AM by Pete Weinman   [ updated Sep 23, 2013, 5:38 AM ]
Download the article HERE.  
The Mortgage Contingency Clause (2013) by Vincent J. Gallo, Esq.,
Chair - RCBA Real Property Committee

 There has been much confusion as to the mechanics of the “Mortgage Contingency Clause” contained in a typical New York Residential Real Estate Contract.  Perhaps a brief genealogy would be in order.

 The original standard form of Residential Real Estate Contract, known as the NYBTU form, did not contain a Mortgage Contingency Clause. Consequently, many attorneys would attach their own form of Mortgage Contingency Rider to the Contact of Sale, and these clauses were varied and inconsistent, and decisions thereon were varied and inconsistent.

 With the dissolution of the NYBTU many attorneys continued to use the NYBTU form until the advent of the 1995 version which contained the following Mortgage Contingency Clause:

 Mortgage Contingency: (Delete if inapplicable) The obligations of purchaser hereunder are conditioned upon issuance on or before ___________________ (the “Commitment Date”) of a written commitment from any Institutional Lender pursuant to which such Institutional Lender agrees to make a first mortgage loan, other than a VA, FHA or other  governmentally insured loan, to Purchaser, at Purchaser’s sole cost and expense, of $ _____________________ or such lesser sum as Purchaser shall be willing to accept, at the prevailing fixed rate of       interest not to exceed                  or initial adjustable rate of interest not to exceed                 for a term  of at least          years and on other customary commitment terms, whether or not conditional upon any other than an appraisal satisfactory to the Institutional Lender. Purchaser shall (a) make prompt application to an Institutional Lender for such mortgage loan, (b) furnish accurate and complete information regarding Purchaser and members of Purchaser’s family, as required, (c) pay all fees, points, and charges required in connection with such application and loan, (d) pursue such application with diligence, (e) cooperate in good faith with such Institutional Lender to obtain such and  (f) promptly give Notice to Seller of the name and address of each Institutional Lender to which  Purchaser has made such application.  Purchaser shall comply with all requirements of such commitment (or of any other commitment accepted by Purchaser) and shall furnish Seller with a copy thereof promptly after receipt thereof. If such commitment is not issued on or before the Commitment Date, then, unless  Purchaser has accepted a commitment that does not comply with  the requirements set forth above, Purchaser may cancel this contract by giving Notice to Seller within 5 business days after the Commitment date, in which case this contract shall be deemed cancelled and thereafter neither party shall have any further rights against, or obligations or liabilities to the other by reason of this contract, except that the  downpayment shall be promptly refunded to Purchaser, and except as set forth in paragraph 27. If Purchaser fails to give notice of cancellation or if Purchaser shall accept a commitment that does not comply with the terms set forth above, the Purchaser shall be deemed to have waived Purchaser’s right to cancel this contact and to receive a refund of the Downpayment by reason of the contingency contained in this paragraph.

 It is important to note that the 1995 version of the form contained a significant typographical error in that it referred to the Clause as a “Mortgage Contingency” Clause, when in reality, it was a “Mortgage Commitment Contingency” Clause. The significant difference between the two is that a Mortgage Contingency Clause is a condition precedent to the existence of the Contract of Sale; whereas if the Mortgage proceeds are not funded at the closing, the Contract may be cancelled, and all obligations thereunder would terminate and the Purchaser is then entitled to the return of the downpayment monies. As a condition precedent, if the Mortgage is not funded, it is treated as if the Contract never existed.  In contrast, a Mortgage Commitment Contingency Clause essentially states that the transaction is only contingent upon the Mortgage commitment being obtained, irrespective of funding, so once the Mortgage commitment is obtained in accordance with the terms of the Contract, the contingency is fulfilled. So if, for example, the Purchaser loses his or her employment, this risk rests exclusively with the Purchaser. 

 The First Department in Kapur v. Stiefel, 264 A.2d 602, 695 N.Y.S.2d 330 (1st Dep’t 1999), held, in reliance upon Creighton v. Milbaur, 191 A.D.2d 162, 594 N.Y.S.2d 185 (1st Dep’t 1993) that based on the 1995 version of the Contract, where a Purchaser obtains a Mortgage commitment, which is later revoked, despite the Contract containing a Mortgage “Commitment” Contingency Clause, since the Contract was devoid of any mechanism as to the procedures to be followed in the event that a Mortgage commitment was later withdrawn, it was therefore compelled to rely on the common law rule that a Mortgage Contingency Clause is construed to create a condition precedent to the Contract of Sale. Therefore, a later revocation of the Mortgage commitment would entitle the Purchaser to the return of their downpayment, provided that they pursued their application in good faith.        

 Interestingly, the dissenting opinion in Kapur v. Stiefel held that the risk of maintaining a Mortgage commitment, upon its issuance, shifts to the Borrower, and if the Borrower fails to maintain their commitment through the closing, by revocation or the unavailability to fund the loan, this risk rests exclusively with the Borrower, and the Borrower is then no longer entitled to cancel the Contract.

 The New York form was then further modified in November of 2000, which then went on to settle the Kapur disparities. It specifically reads, in relevant part:          (a) “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 condition, Purchaser accepts the risk that such condition may not be met”; and (b) “Once a commitment is issued, Purchaser is bound under this Contract even if the Lender fails or refuses to fund the loan for any reason.”

 This language forecloses the Purchaser’s entitlement to the return of his or her downpayment for reasons such as the loss of employment following the issuance of a Mortgage commitment, whereby once the commitment is issued, the Purchaser is then bound to the Contract, with the risk of a revocation of the commitment, or the failure to fund resting exclusively with the Purchaser.

 Does that settle the issue? Not by any means; it only leads to the next question as to who should ultimately bear the brunt of it in the event that a Purchaser forfeits his or her downpayment. The attorney, of course.  A careful reading of Humbert v. Allen, 89 A.D.3d (2nd Dep’t 2011) is foretelling, so tread carefully.

Download the article HERE.