Make Mortgage Contingency Dates Workable & Don’t Wait Until Last Minute For Extensions

by Rich Vetstein on April 17, 2010 · 9 comments

in Massachusetts Real Estate Law, Offer To Purchase, Purchase and Sale Agreements, Realtors

This week, a very interesting decision involving the negotiation of a residential purchase and sale agreement came down from the Massachusetts Appeals Court in Coviello v. Richardson. Click here to view the decision. The case highlights the need for realtors and real estate attorneys to be proactive with respect to mortgage contingencies and requests for extensions.

The Facts

In the case, on February 12, 2008, buyer (Coviello) and seller (Richardson) signed the standard form Offer to Purchase, which provided that a Purchase and Sale Agreement would be executed by 5:00pm on February 26th. Under the mortgage contingency clause of the offer, which gives the buyer the right to cancel if she cannot obtain financing, the buyer was required to secure a firm mortgage commitment by February 29th. The realtor, who prepared the offer, made the first mistake here: requiring her client, the buyer, to obtain a firm mortgage commitment not even 2 weeks after the parties signed the offer. This was and remains completely unrealistic.

Predictably, the buyer and her broker had immediate concerns that they would be unable to meet the mortgage commitment deadline. The broker asked the buyer’s attorney, Scott Kriss, if he would ask the seller to agree to extend the commitment deadline for an additional week. According to the decision, the request was not immediately conveyed to the seller.

Two hours before the 5:00pm deadline to sign the purchase and sale agreement, Attorney Kriss sent an email to the seller’s attorney, Alan Sharaf, requesting the extension. The seller, who was dealing with a high-risk pregnancy, refused to extend the deadline. No agreement could be reached, and there was no tender or signing of the purchase and sale agreement. (It does appear that the pregnant seller got “cold feet” and backed out of the deal–the request for a one week extension is eminently reasonable and wouldn’t have exposed her to any significant risk).

The buyer sued, claiming that the seller’s refusal to agree to the extension was a breach of the deal. The Land Court initially ruled in favor of the buyer, but the Appeals Court overruled the decision in favor of the seller, holding that a jury would have to decide whether the seller repudiated the contract or would have proceeded with the original terms. The case will be heading to trial.

Take Away

In our opinion, the lesson for realtors and attorneys from this case is (1) make the mortgage contingency dates workable in the offer, and (b) if you are asking for an extension at the 11th hour, protect your buyer in case the seller refuses to agree.

First, the realtor should have used a more realistic mortgage contingency deadline. In the current underwriting environment, realtors should allow at least 30-45 from the signing of the offer for a mortgage commitment.

Second, in our opinion, the buyer’s attorney’s apparent delay in asking for the extension until the 11th hour certainly didn’t help the situation. He could have protected the buyer a lot more had he coupled the request for the extension of the mortgage commitment deadline with either (a) notice that if the seller would not agree, the buyer would opt out of the deal entirely, or (b) a tender of the purchase and sale agreement with the original deadlines (assuming the buyer would take on the risk of being unable to make the deadlines). This would have “boxed in” the seller to either agree to the extension or go through the deal, essentially calling her bluff. At least it would have enabled the buyer to have been in a much better position for litigation because now the fight is over whether the seller would have gone through the original deal. Granted, it appears that the pregnant seller had already made up her mind that she wasn’t going through the deal, no matter the reason.

To the credit of the realtor and attorneys involved, it’s much easier for me to play Monday morning quarterback.

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