Luttinger v. Rosen

Supreme Court of Connecticut · Contracts

Contractsconditions precedentmortgage contingencydue diligencecondition precedentmortgage contingencydue diligencerefund of deposit

Facts

The plaintiffs agreed to buy the defendants' Stamford property for $85,000 and paid an $8,500 deposit. The contract was expressly conditioned on the buyers obtaining first mortgage financing from a bank or other lending institution in the amount of $45,000, for at least twenty years, at an interest rate not exceeding 8.5 percent, and required the plaintiffs to use due diligence to obtain such financing. Acting through their attorney, the plaintiffs applied to the only lending institution that could then lend $45,000 on such property, but received a commitment at the prevailing rate at closing, not less than 8.75 percent, which did not meet the contract terms. The plaintiffs gave timely notice and demanded return of the deposit, but the defendants instead offered to fund the difference in interest by an undefined arrangement, which the plaintiffs rejected.

Issue

Whether the plaintiffs used due diligence in attempting to obtain financing under the mortgage contingency clause, and whether the failure to obtain a mortgage meeting the contract's stated terms meant the condition precedent was not satisfied so that the plaintiffs could recover their deposit. Also, whether the defendants' offer to subsidize the interest difference could satisfy the contractual condition.

Rule

A condition precedent is a fact or event the parties intend must exist or occur before there is a right to performance; if it is not fulfilled, the contract is not enforceable. Where a real estate contract is unambiguously conditioned on the buyer obtaining specified mortgage financing from a bank or other lending institution, the buyer satisfies any diligence obligation by making reasonable efforts and need not perform futile acts, and failure to obtain financing on the stated terms means the condition precedent is not met.

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

In Portland, Maine, Nora Patel agreed to buy a house from Daniel Cross for $620,000 and paid a $31,000 deposit. The contract stated that the sale was subject to Nora obtaining first-mortgage financing from a bank or other lending institution for $400,000, for at least 30 years, at an interest rate not exceeding 6.25%, and that if she was unsuccessful after using due diligence and gave timely notice, her deposit would be refunded.

Nora applied to a bank and received a commitment for $400,000 over 30 years at 6.5%. She promptly notified Daniel that she could not obtain financing under the contract and demanded her deposit back. What is the best result?

Explanation. The majority rule treats an unambiguous mortgage contingency as a condition precedent. If the buyer cannot obtain financing matching the specified terms from a bank or other lending institution, the condition is not fulfilled and the contract is unenforceable. A commitment at 6.5% does not satisfy a cap of 6.25%, so timely notice entitles Nora to a refund. (Derived from Luttinger v. Rosen (n.d.).)