Scott Elliott, real estate agent with Re/MAX Cayman Islands, examines the legal effect and meaning of buyer conditions, and some of the issues relating to financing conditions.
So, after listing your home on the market for months and putting up with countless showings and open houses, you’ve finally received an offer and the price is right. Before you break out the champagne and “sign on the dotted line” to accept it, it is essential to take some time to read the offer carefully and discuss it with your agent or ideally your attorney. As is often the case, the offer will contain certain conditions in favour of the buyer.
The most common conditions found in sale agreements are that the deal is “conditional on financing” or “conditional on inspection”. These clauses can cause confusion for buyers, sellers and real estate agents, and rightly so because they are usually poorly drafted and understood by the parties involved.
Firstly, it is important to understand that until the all the conditions in the sale agreement are satisfied or waived by the buyer, the parties do not have a firm deal. Does this mean that the buyer can simply change his/her mind and walk away from the deal? I’m not aware of any Cayman law directly on point, but generally speaking the case law in the UK, USA and Canada consistently says no, every condition must be exercised in good faith. Buyers cannot simply do nothing and then later cancel a deal on the basis that a condition in their favour has not been satisfied. With respect to financing conditions, the requirement to act in good faith means that a buyer make reasonable efforts to satisfy the condition by applying to a lender for a loan and supplying the lender with the usual personal financial information and a property valuation so that the lender can decide whether or not to grant the loan. That’s the theory at least, but like a lot of things in real life, sometimes the actual circumstances are not clear cut as the legal principles would suggest.
For example, say the buyers apply to the bank and receive loan approval, but the interest rate for the loan is higher than the buyers expected. May the buyers cancel the deal? It is certainly questionable whether they can do so. But if the condition was that the financing must be “upon terms satisfactory to the buyers in their sole and absolute discretion”, then the buyers have a much stronger argument to cancel the deal because they can rightly argue that even though the interest rate can be shown objectively to be acceptable to other similar buyers, all that matters here is that they are not happy with the interest rate – a personal subjective standard. They do not have to prove that anyone in their situation would have been unhappy with the interest rate. As you can see, the wording of the clause is absolutely crucial.
What if the buyers have not even made an effort to apply for a loan? The seller can claim the buyers have not acted in good faith to satisfy the condition and can refuse to return the deposit, or sue the buyers for damages for breaching the contract. What if the buyers apply to a bank for the loan but it is not approved? Can the seller then offer to take back a mortgage for the amount required to close and try to force the buyers to waive the condition? The answer is no, unless there was an additional clause added to the agreement that gave the seller the right to provide the financing in the event the buyers were not approved by the lender.
Often I receive offers with financing clauses where no date is specified for the condition to be fulfilled. The effect of this is that the buyers actually have up to the date of closing to obtain financing. This leaves the seller in a very vulnerable position, especially if the closing date is lengthy, given that he may not know until the closing date whether the deal will close or not. I recommend that buyers request at least twenty days to allow sufficient time to arrange for a property valuation, confirm with their lender that they are approved for the necessary funds and have the bank commitment letter prepared and signed. Upon signing this letter, the buyers can then advise the seller that the condition in the offer has been satisfied and the agreement becomes “firm”. As a buyer, never confirm that the financing condition is satisfied until you have the bank’s commitment letter in hand. If you do so, and then for whatever reason the bank is unwilling to lend to you, unless you can obtain funds from another source you will be unable to complete the deal and in breach of contract.
Remember too that when calculating loans banks do not include the value of furnishings or appliances and also do not include stamp duty costs (now 7.5 per cent). For example, let’s say the buyers have $75,000 for a down payment and sign an agreement for $300,000 for a home, which includes $25,000 in furnishings and appliances. The buyers are approved for financing of $225,000. If the bank’s valuator actually values the same property at only $275,000, then the bank in most cases will not lend the buyers the full $225,000. They may only lend 75 per cent of $275,000, which is $206,250 and then expect the buyers to come up with the difference. The buyers will also have to pay for the furniture, appliances and stamp duty. If the buyers have already advised the seller that the financing condition is satisfied, it can be extremely difficult for them to come up with the extra funds in time. Before even starting to look for a home, the buyers should first meet with a lender to find out how much they can safely afford to borrow. They should also ask what the lender’s valuation practices are and what other conditions have to be satisfied before they receive their funds. It is very important for buyers to understand all legal rights and obligations relating to a financing condition, the terms that a lender will require before handing over the mortgage proceeds and the completion process.