Kapur v. Stiefel
1999 N.Y. App. Div. LEXIS 9087, 695 N.Y.S.2d 330, 264 A.D.2d 602 (1999)
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Rule of Law:
When a real estate contract's mortgage contingency clause is silent regarding the revocation of a financing commitment, the purchaser's performance is excused and they are entitled to the return of their down payment if the commitment is revoked through no fault of their own, provided they acted in good faith.
Facts:
- Plaintiff entered into a contract to purchase a cooperative apartment from the defendants and paid a down payment, which was held in escrow.
- The contract of sale included a mortgage contingency clause.
- Plaintiff successfully obtained a mortgage commitment letter from a lender within the time specified by the contract.
- After the commitment was issued but before the closing, the plaintiff's employment was terminated.
- Plaintiff notified the lender of his change in employment status.
- The lender subsequently revoked the mortgage commitment.
- Plaintiff then notified the sellers that he could not proceed with the purchase and demanded the return of his down payment.
- The sellers refused to return the down payment, claiming the plaintiff was in default.
Procedural Posture:
- Plaintiff (purchaser) sued defendants (sellers) in the Supreme Court of New York County, a trial court.
- Plaintiff filed a motion for summary judgment to recover his down payment.
- Defendants filed a cross-motion for summary judgment to retain the down payment.
- The trial court denied the plaintiff's motion, granted the defendants' cross-motion, and ordered the down payment to be released to the defendants.
- Plaintiff appealed the trial court's order to the Supreme Court, Appellate Division.
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Issue:
Does a purchaser's loss of a mortgage commitment after the contractual contingency period, due to circumstances allegedly not of his own making, excuse his performance under the contract and entitle him to the return of his down payment when the contract is silent on the issue of commitment revocation?
Opinions:
Majority - Nardelli, J.P., Mazzarelli and Lerner, JJ.
Yes, the purchaser's performance may be excused. When a contract is silent on the consequences of a mortgage commitment revocation, the purchaser's right to their down payment depends on whether the revocation was attributable to bad faith on their part. The court reasoned that a mortgage contingency clause creates a condition precedent to the contract of sale. If that condition fails through no fault of the purchaser, their performance is excused as long as they acted in good faith. The court rejected the dissent's view, stating it would put a purchaser in the 'unenviable position' of either closing without financing or forfeiting their deposit, even if a lender arbitrarily revoked the commitment. Because questions of fact existed as to whether the plaintiff's job loss was a circumstance of his own making intended to cause the transaction to fail, summary judgment for either party was inappropriate.
Dissenting - Saxe, J.
No, the purchaser's performance is not excused, and he is not entitled to the return of his down payment. The dissent argued that the contract's financing contingency was fully satisfied when the plaintiff obtained the commitment letter. Once that condition was met, the risk of the financing falling through prior to closing shifted entirely to the purchaser. The plaintiff's job loss did not constitute legal impossibility to excuse performance, as it was a foreseeable event that could have been guarded against in the contract. The majority's reliance on a 'good faith' analysis improperly departs from fundamental contract law in favor of an 'equity-laden analysis founded in nothing more than sympathy for the unfortunate buyer.'
Analysis:
This decision solidifies the default rule in New York that a mortgage contingency is treated as a continuing condition precedent that must hold through closing, not merely as a condition to obtain a commitment letter. It establishes that unless a contract explicitly allocates the risk of a post-commitment revocation, the buyer's good faith will be the determining factor for the return of a down payment. This ruling incentivizes sellers and drafters of real estate contracts to include specific language addressing the consequences of a lender's revocation of financing to avoid this default, judge-made rule.
