Fry v. George Elkins Co.

California Court of Appeal · Contracts

Contractscondition precedentgood faithreal estate contractdeposit forfeiturebroker commissionrescissionsubstantial evidence

Facts

Plaintiff offered to buy the Millers' home for $42,500 and deposited $4,250, with the offer and escrow both conditioned on his obtaining refinancing of $20,000 at 5 percent for 20 years. He was told a bank likely would not make such a loan but that Western Mortgage, which already held a loan on the property, probably would; Western later indicated it would consider such a loan, and plaintiff was repeatedly told the required loan was available if he would sign the application papers. Plaintiff applied only to two banks, did not apply to or meaningfully inquire of Western Mortgage, objected to a prepayment provision not contained in the contract, and evidence indicated he had lost interest in the house and changed his plans. After the escrow expired, the sellers sold the home to others for less and with included personal property, paid an attorney to close that transaction, and the broker retained a commission under the original agreement.

Issue

Whether substantial evidence supported the findings that plaintiff failed in good faith to seek the required financing, thereby breached the purchase agreement, and that there was no mutual rescission. Also, whether the sellers were entitled to deduct the broker's commission and other proved damages from plaintiff's deposit.

Rule

When a contract is conditioned on the buyer obtaining financing, the buyer has an implied obligation to make a good-faith effort to obtain that financing on the specified terms. A buyer cannot reject offered financing based on additional objections not made part of the contractual condition. If the buyer's lack of good-faith effort causes the transaction to fail, that failure constitutes a breach, and the seller may retain from the buyer's deposit the damages proved to have resulted from the breach; on appeal, findings supported by substantial evidence will not be disturbed.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Phoenix, Nina Porter signed a contract to buy a townhouse from Omar and Elena Ruiz for $510,000. The contract was expressly conditioned on Nina obtaining a 30-year mortgage at 6 percent, and she was told by the listing broker that local credit unions rarely made 30-year loans on that type of property but that Desert Mesa Funding, which already serviced the building's loans, was prepared to review her application; Nina nevertheless applied only to two credit unions and never contacted Desert Mesa Funding.

If the sale fails and Nina demands return of her deposit on the ground that the financing condition was not met, which is the strongest argument for the sellers?

Explanation. The majority held that when a purchase is conditioned on the buyer obtaining financing, the buyer must make a good-faith effort to obtain financing on the specified terms. Applying only to lenders known to be unlikely to make that kind of loan, while failing to pursue an identified likely source, supports a finding that the buyer did not act in good faith and therefore breached. (Derived from Fry v. George Elkins Co. (n.d.).)