At Berlin Patten Ebling, we see great confusion concerning buyer’s and seller’s rights and obligations under the contractual contingencies of “AS IS” Residential Contract for Sale and Purchase (“AS IS”) and Residential Purchase and Sale Contract (“Standard Contract”) (collectively known as “FAR/BAR” hereinafter). Simply put, there are real earnest money deposit consequences to missing deadlines equals. Today, let us look at my holiday story of Joe Poinsettia (“Joey”) and Reindeer Jill (“Jill”). Joey wants to buy Jill’s “V” Coastal Areas FEMA flood zone home with lender financing with a $25,000 earnest money deposit (“Deposit”). Joey’s realtor drafts up a FAR/BAR offer that requires Joey to close with 80% financing for a 30-year fixed loan and a $20,000 balance to close. Joey’s realtor includes the standard contingencies and states to Joey that if he doesn’t obtain funding approval from his lender, the FAR/BAR financing contingency will protect the Deposit. Joey agrees, and upon Jill’s acceptance, Joey submits his lender application.
Joey realizes he made a big mistake – he needs a bigger loan. Instead of canceling the transaction, Joey seeks alternative lender financing to fund the transaction. Joey bundles this transaction and another refinance in one big 1-year loan to bring more cash to close. Essentially, he has to borrow more than the amounts listed in Sections 2 & 8 of the FAR/BAR transaction. A financing breach! This action wouldn’t matter if Joey could still close with the purchase price, but Joey’s lender now requires more insurance to cover his higher loan. Joey decides he needs to retain Jamie the Grinch to help him terminate the contract and get back his Deposit. Jill disagrees and hires Evan the Wise Man, who states Joey missed his contingencies deadlines and can’t cancel. The parties litigate, and a fact finder enters judgment against Joey with a significant attorney fee award. Joey wonders to himself, “Where did it all go wrong?”
What are the contingencies?
First, Joey should have hired Jamie the Grinch before trouble arose. Hiring an attorney after a breach is tantamount to calling in Gordon Ramsey for Holiday cooking relief after the turkey is bitter, charred, and still on fire. Secondly, Joey should have understood that FAR/BAR deadlines passed are opportunities missed.
- Flood Zone & Elevation Certification Contingency. A lesser-known contingency might have allowed Joey to cancel the transaction if Jill’s property was unacceptable for lending with respect to flood elevation or public/private flood insurance.
- Property Contingency. The Property Contingency is the most common contingency and is part of the “AS IS” or an addendum to the Standard Contract. A buyer may terminate the transaction for any reason and will be allowed to cancel the transaction even when the buyer states the sky is “purple” because the acceptability of the condition of the property is solely up to the buyer and not the seller. Once this contingency passes, a buyer’s right to cancel is limited.
- Appraisal Contingency. This common contingency may be either an addendum or under Section (8)(b)(vii)(3), which allows the return of the deposit if the transaction fails by reason the appraisal of the real property subject to the sale is insufficient to meet the terms of the financing. It is important to note that Joey would be unable to seek relief under this contingency because it would reveal to the seller that he applied for more than the agreed-upon financing terms of the contract, and was in breach of the contract and the Deposit forfeited.
- Financing Contingency. The Financing Contingency is a well-known financing contingency where a buyer provides termination notice of the FAR/BAR transaction because of a buyer’s inability to procure a loan pursuant to the financing terms within the loan approval period; however, this contingency does not save a buyer when the loan does not fall within perimeters of FAR/BAR’s Section 2 & 8. A buyer also won’t get a “second bite of the apple” under (8)(b)(vii) when the buyer is in breach, even if the loan fails by reason of the appraisal, a property-related condition or if the seller fails to satisfy other contingencies under the transaction. Florida courts routinely do not grant forfeiture relief to a party when the breach results from the party’s neglect, negligence, or violation of the agreement. It is essential to note that Florida courts will interpret the parties’ agreement as written and will not relieve a party from an agreed-upon imprudent bargain. As such, a buyer must strictly comply with the terms of the FAR/BAR transaction if the buyer wishes to receive the return of the FAR/BAR deposit. Courts require strict compliance and not “substantial” compliance. In other words, half-cooked holiday contractual compliance equals buyer earnest money deposit salmonella!
Whether you represent a buyer or seller, when there are contingencies involved, you must determine if your client complies with the contract prior to any upcoming expiration deadlines and if the buyer can stomach losing the deposit. We want you to have a happy holiday season and hope it is celebrated versus Jill’s and Joey’s. If you have any questions prior to and during your closing, do not hesitate to contact your local real estate attorney to discuss these and other not mentioned contingencies that may affect your closing and holiday cheer.