RETHINKING FINANCING CONDITIONS

August 18, 2016

It is 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 a buyer protection if he cannot find a lender, or cannot afford the mortgage payments. However, financing conditions are often relied on by buyers, and written by their agents, to create a nonbinding cooling off period. There is a common misconception that a financing condition legally enables a buyer to change his mind about a house and back out of the deal.


The wording of the financing condition commonly reads as follows: 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 a period of three to seven days.


It is important for buyers and their agents to understand that when a purchase agreement is conditional on financing, the buyer still has the legal obligation to use his best efforts to satisfy this condition. This means that in order to legitimately rely on a financing condition to cancel a purchase agreement, a buyer 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, or the seller can sue the buyer for damages for breaching the contract. When assessing whether the buyer used his best effort to obtain financing, Court will consider amongst other things: the mortgage amount applied for in relation to the purchase price, delay in applying for the mortgage and any evidence proving that the buyer used the condition to renege on the contract for extraneous, non-financing reasons. 


It is 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 the buyer from the requirement to use his 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 imputes a broad subjective element and comes very close to turning the condition clause into an option clause. When assessing whether a buyer withheld his satisfaction unreasonably, Courts apply a combined subjective and objective standard to the conduct of the buyer. In other words, Courts will assess whether the buyer was able to obtain financing satisfactory to a reasonable person with all the subjective but reasonable standards of that particular buyer.


The key takeaway is that while it is true that the threshold is low, if a financing condition has been disingenuously relied on, a buyer could lose his deposit or be sued for damages, and in turn, 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, 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 seller should insist that those specific values are written into the contract. This enables the seller to know how genuine and reliable the buyer is, while not limiting the buyer’s protection against unforeseen circumstance frustrating his ability to obtain reasonable financing.

Monica Peters is a lawyer at Garfinkle Biderman LLP in Toronto. Monica specializes in commercial litigation and arbitration with a strong focus on property-related disputes. Monica can be reached at 416.869.7647 or mpeters@garfinkle.com.

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