Ever heard that phrase? Well, it couldn’t be more true than in real estate transactions, and a recent Florida case has reemphasized this idiom.
The Fourth District Court of Appeal in the case of Florida Investment Group 100, LLC v. Lafont, 44 Fla. L. Weekly D1063 (Fla 4th DCA 2019) analyzed the financing contingency of the FAR-BAR “As Is” Residential Contract for the Sale and Purchase. This particular financing paragraph stated that the transaction was contingent upon the Buyer obtaining “Loan Approval” for a conventional loan in the amount of $465,000 at a fixed interest rate and for a term of 30 years. The contract gave the buyer 30 days to acquire such a Loan Approval. Loan Approval is defined in the contract as an “approval of a loan meeting the Financing terms [of the contract].”
It is important to note that the buyer never received a Loan Approval meeting the Financing terms of the contract. Instead, the buyer received a conditional approval from a lender for a loan that had completely different terms than stated in the contract. Moreover, the buyer never informed the seller of the conditional approval, nor did she cancel the contract before the end of the Loan Approval Period.
Later, an appraisal was obtained that was insufficient to allow the buyer to obtain financing necessary for the purchase. She attempted to cancel the contract, and then failed to close on the closing date. The seller put forth a claim on the buyer’s earnest money deposit, and the buyer filed suit to recover the deposit. The buyer claimed the contract allowed her to cancel under the following provision, “[i]f Loan Approval has been obtained, or deemed to have been obtained … and Buyer fails to close this Contract, the Deposit shall be paid to Seller unless failure to close is due to … (3) appraisal of the Property obtained by Buyer’s lender is insufficient to meet the terms of the Loan Approval.”
The trial court agreed with the buyer. However, on appeal, the appellate court reversed the decision. The appellate court found that since Loan Approval had not been obtained nor had the buyer cancelled the contract prior to the end of the Loan Approval Period, the Loan Approval was “deemed to have been obtained.” However, in such a situation, the court said a buyer cannot then rely on the insufficient appraisal excuse to justify buyer’s nonperformance. “Deemed to have been obtained” is not obtained; rather, it is a “legal fiction,” as the court stated. The court found that in such a case, “there was never a Loan Approval as defined in the contract that would allow this court to look at the ‘terms of the Loan Approval’ to decide whether an appraisal of the property was insufficient to meet its terms.”
Furthermore, the court found it irrelevant that the appraisal of the property was insufficient to meet the terms of the conditional loan approval that the buyer did obtain, because that loan approval was on entirely different terms than were stated in the contract and therefore that did not constitute Loan Approval as defined in the contract.
In summary, I see two important takeaways from this case: (1) be sure that borrowers are applying for loans on terms as defined in the financing contingency of the contract, and (2) be sure that they get a written Loan Approval on those terms during the Loan Approval Period (or as extended), especially if that Loan Approval remains conditioned upon an acceptable appraisal.
This should also be a reminder to the residential lenders out there that they should be reviewing the financing contingency sections of these contracts to ensure that the mortgage financing they are working on matches what is in the client’s contract; otherwise, the financing contingency needs to be amended by a fully executed addendum to the contract.
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