BUYER BEWARE

July 06, 2017

Financing conditions are by no means an escape clause for buyers having second thoughts. On the contrary, the abuse of these clauses can result in a buyer's financial ruin.

            It's a common practice for real estate agents to make offers conditional on the buyer obtaining the financing necessary to complete the purchase. A financing condition offers buyers protection only if they can't find a lender or can't afford the mortgage payments. However, financing conditions are often relied on by buyers, and written by their agents, to create a non-binding cooling-off period. There is a common misconception that a financing condition legally enables buyers to change their mind about a house and back out of the deal. This is simply not the case.

            The wording of the financing condition commonly reads: This agreement is conditional on the buyer being able to arrange satisfactory financing in the buyer's sole and absolute discretion. The associated conditional period typically lasts for three to seven days.

            It’s important for buyers and their agents to understand that when a purchase agreement is conditional on financing, buyers still have the legal obligation to use their best efforts to satisfy this condition and purchase the property.

This means that in order to legitimately rely on a financing condition to cancel a purchase agreement, buyers must actually apply for financing and be turned down. If not, the seller can claim the buyer acted in bad faith and can refuse to return the buyer's deposit; the seller can also sue the buyer for damages for breaching the contract. When assessing whether buyers used their best efforts to obtain financing, the court will consider, among other things, the mortgage amount applied for in relation to the purchase price, any delay in applying for the mortgage and any evidence proving that the buyer used the condition to renege on the contract It's important for buyers and their agents to understand that when a purchase agreement is conditional on financing, buyers still have the legal obligation to use their best efforts to satisfy this condition and purchase the property for reasons completely unrelated to financing.

THE FINE PRINT

            It's a common misunderstanding that phrases such as 'for the sole benefit of the buyer' or 'in the buyer's sole and unlimited discretion' will release buyers from the requirement to use their best efforts to obtain financing. On the contrary, courts have insisted that a buyer's discretion must be exercised honestly, in good faith and reasonably, regardless of the insertion of either of these phrases.

            A stronger but not ironclad protection comes from the phrase 'satisfactory financing.' This discretionary phrase adds a broad subjective element to the situation; it comes very close to turning the condition clause into an option clause. But when assessing whether buyers withheld their satisfaction unreasonably, courts apply a combined subjective and objective standard to the conduct of the buyer. In other words, the court will try to determine whether the buyer was able to obtain financing that would be satisfactory to a reasonable person with all the subjective but reasonable standards of that particular buyer.

AVOID LEARNING THE HARDWAY

            Even though the threshold is low, if buyers disingenuously take advantage of a financing condition, they could lose their deposit or be sued for damages. Consequently, agents could be held liable for misrepresenting the function of a financing condition clause to the buyers.

            Another key takeaway is that agents acting for sellers should remove subjective elements from a financing condition clause. Financing conditions should never be subject to the buyer's 'discretion,' 'opinion' or 'satisfaction.' Financing can be objectively measured, so the tastes or sensibility of the buyer have no relevance.

            If a buyer needs a certain mortgage amount or interest rate for the purchase to be feasible, the sellers should insist that those specific values be written into the contract. Such language will enable sellers to know how genuine and reliable the buyers are, while doing nothing that will weaken buyers' protection against unforeseen circumstances or frustrate their ability to obtain reasonable financing
It's important for buyers and their agents to understand that when a purchase agreement is conditional on financing, buyers still have the legal obligation to use their best efforts to satisfy this condition and purchase the property.

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