Disputes over the right of a seller to keep, or the duty to return, the down payment on a failed residential contract of sale are common, contentious and fact-specific. And regularly arise out of a contingency clause that conditions the purchaser's obligation to close on the ability to obtain a mortgage loan. The outcome is often determined by the purchaser's course of conduct as measured against the language of the contract. Two recent examples follow:
Doony, Inc., owned by Dr. Nonyelu Anyichie, sued Mark Palmiotto to recover a $43,500.00 down payment made in connection with a contract to buy the real property at 126 Mount Vernon Avenue, Mount Vernon, New York. Palmiotto’s attorney, John J. Pacor, Esq., the escrow agent, was also sued.
In support of a motion for summary judgment, Doony submitted the contract and an affidavit from Anyichie, who stated that she put $43,500.00 down when she signed the contract on or about June 23, 2017. for $435,000.00. The contract provided that “a commitment conditioned on the Institutional Lender’s Approval of an appraisal shall not be deemed a ‘Commitment’ hereunder until an appraisal is approved (and if that does not occur before the Commitment Date, Purchaser may cancel under subparagraph 6 (d) unless the Commitment Date is extended)”. The Commitment Date was July 24, 2017.
Anyichie conceded that there was a “bit of a delay in my sending the application” as she was relocating her New York City office and was occupied with various activities in preparation for a military deployment. Anyichie also noted that she received a commitment letter from the lender, non-party Citibank, N.A., dated August 7, 2017, which provided that the premises had to be appraised at a value of $435,000 in order to receive a loan. Citibank’s subsequent appraisal set the value of the property at $395 ,000.
Efforts to negotiate around the differential were unsuccessful and Anyichie demanded the return of the down payment, which was refused. While the Commitment Date was not extended, Anyichie nevertheless contended that no commitment, as defined by the contract, was obtained prior to the Commitment Date and, as such Doony had the right to cancel the contract.
Supreme Court found that Doony failed to make a prima facie showing of entitlement to a return of the deposit.
The contract provided in relevant part that:
“The obligation of Purchaser to purchase under this contract is conditioned upon issuance, on or before 30 days from receipt by Purchaser’s attorney of fully executed contracts (the “Commitment Date”), of a written commitment from an Institutional Lender pursuant to which such Institutional Lender agrees to make a first mortgage loan… to Purchaser at Purchaser’s sole cost and expense, of $391,500.00 for a term of at least 30 years (or such lesser sum or shorter terms as Purchaser shall be willing to accept) at the prevailing fixed or adjustable rate of interest and on other customary commitment terms (the “Commitment”).”
“[H]owever, a commitment conditioned on the Institutional Lender’s approval of an appraisal’ shall not be deemed a ‘Commitment’ hereunder until an appraisal is approved (and if that does not occur before the Commitment. Date, Purchaser may cancel under subparagraph 6 (d) unless the Commitment Date is extended).”
Palmiotto asserted that the contract was dated June 23, 2017 and that the Commitment Date was July 24, 20l7. Subparagraph 6 (b) of the Contract provided that Doony was obligated to perform certain tasks. In relevant part, the subparagraph provided that:
“Purchaser shall (i) make prompt application to one or, at Purchaser’s election, more than one Institutional Lender for such mortgage loan, (ii) furnish accurate and complete information regarding Purchaser and members of Purchaser’s·family, as required, (iii) pay all fees, points and charges required in connection with such application and loan, (iv) pursue such application with diligence, (v) cooperate in good faith with such Institutional Lender(s) to obtain a Commitment and (vi) promptly upon request, give notice to Seller of the name and address of each Institutional Lender to which Purchaser has made such application.”
Anyichie conceded that the application was delayed, but asserted that she had good reason. Doony did not address whether it applied to more than one institutional lender nor address its compliance with the other aspects of subparagraph 6 (b). Even assuming compliance was fully made, subparagraph 6 (d) of the Contract provided that Doony could cancel the Contract, if it did not obtain a Commitment before the Commitment Date. To exercise the option, subparagraph 6 (d) provided that ”Purchaser [] may cancel this contract by giving Notice to the other party after the Commitment Date, provided that… the Notice includes the name and address of the Institutional Lender(s) to whom application was made....”
Doony provided no evidence that it provided the “Notice,” as required by subparagraph 6 (d) Accordingly, Supreme Court denied Doony's motion.
The Appellate Division affirmed. On June 23, 2017, Doony entered into a contract to purchase real property from Mark Palmiotto for $435,000 and, upon execution of the contract, tendered a down payment of $43,500. Pursuant to the contract, Doony was required to promptly apply to one or more institutional lenders for a mortgage loan in the amount of $391,500. Doony's obligations to complete the sale were contingent upon the issuance of a commitment from an institutional lender on or before 30 days from receipt by its attorney of a fully executed contract. The contract of sale expressly provided that “a commitment conditioned on the Institutional Lender’s approval of an appraisal shall not be deemed a Commitment’ hereunder until an appraisal is approved.”
On August 7, 2017, Doony obtained a commitment from a lender conditioned upon an appraisal showing an “as is” fair market value of the property of not less than $435,000. The appraisal, which was performed on August 18, 2017, and issued on August 31, 2017, valued the premises at $395,000. As a result, Doony asserted that no commitment as defined by the contract had been issued, and demanded the return of the down payment, but Palmiotto refused to return the funds.
The appeals court found that Doony failed to establish a prima facie entitlement to judgment as a matter of law. In her supporting affidavit, Anyichie conceded that Doony delayed in filing an application for a mortgage loan, and she failed to state when Doony applied and the number of institutional lenders to which application was made. Moreover, Doony failed to set forth the date on which its attorney received the fully executed contract, thereby rendering it impossible to ascertain if the lender’s denial was timely, so as to trigger the right to cancel. Under such circumstances, Doony failed to eliminate all triable issues of fact as to whether it made a prompt application for a mortgage loan and whether it properly cancelled the contract.
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On March 11, 2016, Jia and Yong Mao Chen entered into a contract to purchase real property from Patrick McKenna for $945,000, and upon the execution of the contract, they tendered a down payment of $94,500.
Pursuant to the contract, the Chens were required to promptly and diligently apply to institutional lenders for a mortgage loan in the amount of $470,000. The sale was contingent upon the Chens obtaining a mortgage loan within 60 days of the date of the contract.
The Chens provided McKenna with a January 2016 statement for their joint checking account maintained at East West Bank, showing an ending balance of $557,214.88. They also provided a letter dated February 24, 2016, from Dollarwise Mortgage, stating that they qualified for a 30-year mortgage in the amount of $600,000, conditioned upon a “satisfactory appraisal value.”
After the Chens were granted two extensions of the time to obtain a mortgage commitment, their attorney sent McKenna's attorney a copy of a letter in which Cathay Bank denied a mortgage application of Yong Mao Chen due to insufficient income. The Chens' attorney requested the return of the down payment.
In response, McKenna's attorney noted that only one of the Chens had applied for the mortgage loan, and that upon receiving additional information, he would advise the Chens' attorney whether McKenna would declare the Chens to be in default.
Subsequently, the Chens' attorney requested additional time to obtain a mortgage commitment. McKenna's attorney informed the Chens' attorney that no further extension of time would be granted, and that the Chens were in default under the terms of the contract.
The Chens sued McKenna to recover the down payment, as well as compensatory and punitive damages. In his answer, McKenna interposed a counterclaim to recover damages for breach of contract, seeking to retain the down payment as liquidated damages. The Chens moved for summary judgment on the complaint and dismissing the counterclaim. McKenna cross-moved for summary judgment dismissing the complaint and on his counterclaim. Supreme Court denied the motion and the cross motion. Both the Chens and McKenna appealed.
Where a contract for the sale of real property contains a mortgage contingency clause, as long as purchasers exert a genuine effort to secure mortgage financing and act in good faith, they are entitled to recover their down payment if the mortgage is not in fact approved through no fault of their own.
Here, the appeals court agreed that the Chens failed to establish their prima facie entitlement to judgment as a matter of law on the complaint and dismissing the counterclaim. Although Yong Mao Chen’s demonstrated that she timely applied for a mortgage loan from Cathay Bank, which denied the application, the Chens failed to eliminate all triable issues of fact as to whether both of them made diligent, good-faith efforts to secure mortgage financing.
Similarly, McKenna failed to establish his prima facie entitlement to judgment as a matter of law dismissing the complaint and on his counterclaim, since he did not eliminate all triable issues of fact as to whether the Chens failed to act in good faith or exert genuine efforts to secure mortgage financing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
