Mortgage Contingency Update: A Helpful Court Decision

We recently reported on the “standard” mortgage contingency clause which the Pennsylvania Association of Realtors (“PAR”) has promulgated in its form residential agreement of sale which is used widely.  The form provides that if the mortgage contingency fails, it is the seller, not the buyer, who has the option to terminate the agreement.  It may well be that most sellers, like most buyers, assume that the buyer has the right to terminate the agreement because the contingency runs to the advantage of the buyer; and in practice most sellers routinely permit the buyer to terminate where the contingency fails because the buyer is unable to obtain a mortgage loan commitment.

 Since our article appeared, there has been a recent decision, Quinn v. Bupp, in which the Pennsylvania Superior Court faced the issue where a seller had a change of heart and did not want to complete the sale where the agreement was on a PAR form.  Seizing on a technicality that the mortgage loan commitment the buyer had received was not in precise conformity with the mortgage contingency requirement in the agreement used in the sale, the seller refused to go to settlement even though the buyer was ready, willing, and able to complete the transaction.

In an eminently sensible decision, the Superior Court held that the seller was bound and had to complete the sale, saying that the seller was “attempting to create phantom conditions on [the contingency] to avoid his contractual obligations.”  The decision essentially ignored the language of the agreement and reinforced a long-held legal concept that where an agreement contains a contingency in favor of one party, that party may waive it and complete the transaction, even though the contingency has not been met.

 We think the decision is very helpful.  Still, prudence dictates that a buyer should not enter into an agreement on a PAR form without modifying the mortgage contingency provision to permit the buyer to terminate the agreement if the contingency is not met; additionally there should be a provision specifically permitting the buyer to waive the contingency and complete the transaction.  As clear as the decision is in the Quinn case, you are far safer to correct the flaw in the agreement at the outset; by doing so, you greatly reduce the possibility of litigation, always a desired circumstance.

 The largest single transaction that most of us ever enter into is the purchase or sale of a residence; while we are lawyers and probably not objective on the subject, we think it is a very good idea to have an attorney at least to review your agreement of sale before you sign it. (There is nothing that frustrates an attorney more than to be given a fully executed agreement of sale for review; in such cases the die is cast, and remedies are much more difficult once an agreement is signed.)

 Among lawyers, we scratch our heads, wondering why the folks at PAR refuse to change a form that contains such a flaw.

 — Ken Butera

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