We have just learned that on April 4, 2017, the FAR/BAR form contract will again be revised primarily in response to the confusion surrounding the financing contingency. Although the revised form cleans up or otherwise clarifies other provisions of the contract (we will roll out a summary of all of the changes independent of this blog prior to the April 4, 2017 roll out), the most significant change involves a revamped version of Section 8(b) thereof, more commonly referred to as the financing contingency. Some of the more material changes to the new financing contingency are summarized as follows:
- The concept of a “written loan commitment” has been removed altogether in response to the fact that rarely do written loan commitments ever get issued on residential real estate transactions. Instead, the financing contingency is now satisfied upon “Loan Approval.” However, the term Loan Approval is defined very broadly as the “approval of a loan meeting the financing terms.” Notably, there is no requirement that Loan Approval be in writing (as was previously required with the Loan Commitment requirement), which is sure to generate some discussion.
- The default Loan Approval Deadline has been reduced from 45 days to 30 days. We assume that this change, along with the other changes addressed below, is designed to require Buyer(s) to use more diligence to obtain Loan Approval sooner.
- The contract was amended to make it clear that if the Loan Approval requires the sale of other property, that is not considered a Loan Approval.
- Notably, the new contract requires the Buyer to use “diligent effort” to obtain Loan Approval, and the failure to do so is now identified as a specific event of default under the new contract. The new contract goes on to define “diligent efforts,” which “includes, but is not limited to, timely furnishing all documents and information and paying of all fees and charges requested by Buyer’s mortgage broker and lender in connection with Buyer’s mortgage application.” This provision was likely added in response to the common practice of a Buyer using the financing contingency to escape a contract when they genuinely did little or nothing to actually pursue financing. Interestingly, the new contract defines “diligent effort” to include, but not be limited to….” (a) timely providing information and (b) timely paying fees. In legal jargon, this was done to make it clear that “diligent efforts” requires something more than just providing information or paying fees, although the new contract does not specify what additional factors might constitute “diligent efforts.” This could make it a bit tricky to recover a Buyer’s deposit if they intend to use the financing contingency to cancel a contract, since they will now need to demonstrate “diligent efforts” to obtain financing. The new contract indicates that such efforts involve something more than timely providing information and paying fees without specifying what that might be.
- The new contract now authorizes the release of preliminary and finally-executed closing disclosures and settlement statements to the Seller and Broker.
- Upon receipt of the Loan Approval, the Buyer must deliver written notice to the Seller, as was the case previously. However, if the Buyer was unable to obtain Loan Approval after diligent efforts, then the Buyer must provide notice to the Seller prior to the end of the Loan Approval Period of the Buyer’s intent to cancel or the contingency is deemed waived. This is a significant departure from the prior version of the contract, in which the Buyer continued to maintain the right to cancel until 7 days prior to closing. That is now no longer the case, and the revision to the contract makes the contingency more akin to a true contingency, whereby the Buyer must make the decision to cancel or proceed prior to the expiration of the Loan Approval Period. Indeed, this change remedies the most common misunderstanding of the previous version of the financing contingency, namely that the Buyer was locked in once the Loan Approval Period had lapsed. That was previously not the case. With this change, the Buyer is now locked in if they elect to proceed beyond the Loan Approval Period.
- The new contract language continues to give the Seller the right to terminate the contract, but the Seller must now do so within three (3) days after the expiration of the Loan Approval Period, and only if the Buyer has not delivered written notice to the Seller that the Buyer has obtained Loan Approval within the Loan Approval Period. Previously, the Seller could cancel until seven (7) days prior to the closing.
The modifications to the financing contingency will obviously take some time to absorb, but do attempt to address three critical issues with the prior version, namely (a) the use of the term loan commitment when rarely was one ever actually issued and the introduction of the concept of a loan approval, (b) the introduction of a diligent efforts standard and a clarification that the failure to use such efforts will cause the Buyer to be in default, and (c) the elimination of the ability of either party to cancel the contract up until seven (7) days prior to closing.
As with any contract changes, there will always be some degree of debate as to how effective the changes will be, and whether or not the changes may have created unintended issues. That is why we always recommend that if you have any questions about the changes to the financing contingency, or any other changes to the contract once the new contract is formally rolled out, you should consult with your real estate attorney.
Berlin Patten Ebling, PLLC
Article Authored by Evan Berlin, Esq. firstname.lastname@example.org
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