Contracts for the sale and purchase of Florida real estate impact nearly all of us, whether our firms are engaged in transaction representation, or whether our clients are otherwise impacted by transactions. Recently Florida’s Fourth District Court of Appeal addressed whether a buyer is entitled to recover her sales contract deposit when the buyer waived the contract’s financing/loan approval contingency, and a subsequent appraisal did not meet either the contract’s Loan Approval specifications or the lender’s requirements. The Court’s determination that a “deemed” Loan Approval is a “legal fiction” may result in caution by buyers, and their counsel!
At the center of Florida Inv. Group 100, LLC v. Lafont, Case No. 4D18-2075 44 Fla. L. Weekly D 1063 (Fla. 4th DCA April 24, 2019), was an ““AS IS” Residential Contract for the Sale and Purchase.” The sales price was $620,000.00. The buyer’s deposit was $62,000.00.
The Contract’s financing contingency included a “Loan Approval” within 30 days of a mortgage for $465,000.00, at a fixed rate of interest for a 30 year term. The Contract defined the term “Loan Approval” as “approval of a loan meeting the Financing terms.” Options flowing from the definition included:
- If Loan Approval was obtained, buyer was to provide prompt notice to seller.
- If Loan Approval was not obtained before the Loan Approval period, the buyer was to provide the seller notice in writing and either: waive the Loan Approval; or, terminate the contract.
- If the buyer failed to provide Loan Approval notice, then Loan Approval contingency shall be deemed waived, in which event the Contract continues as if Loan Approval had been obtained….”
The Contract further provided an appraisal condition:
- If Loan Approval was obtained or was deemed to be obtained, and
- If an “appraisal of the Property obtained by Buyer’s lender is insufficient to meet terms of the Loan Approval”; then,
- The deposit is to be refunded to the buyer.
The issue was joined whether the appraisal condition could be invoked to terminate the contract and return the buyer’s deposit when the buyer did not obtain Loan Approval as defined in the contract, and the buyer did not provide written notice of no Loan Approval to the seller.
Instead of the buyer obtaining the Loan Approval as defined or providing termination notice, after the Loan Approval deadline the buyer obtained a conditional loan approval for $495,000.00 mortgage, not $465,000.00 as provided in the Contact, and for 12 months interest only, not the 30 year fixed. Thereafter the lender obtained an appraisal determining the market value at $485,000.00 which was $135,000.00 less than the purchase price. The lender refused to fund because the appraisal amount was below the contract loan approval amount and the financing maximum 80% loan to value ratio.
The court’s analysis starts with reciting “standard” contract interpretation rules: not to read words in isolation but to give the entire contract a reasonable reading; and, to interpret a contract based on the contract’s definitions.
Because “Loan Approval” was defined by the Contract, the Court would not vary the contract’s definition: $495,000.00, 30-year fixed interest rate. The Contract’s definition meant that buyer’s different mortgage terms was not a “Loan Approval.”
Focusing on the appraisal contingency’s text “… insufficient to meet terms of the Loan Approval”, the Court held that without financing that equaled the defined Loan Approval terms, then the appraisal contingency cannot be triggered to refund the deposit.
Stepping back, what is the role of the Contract’s language if notice of a failure to obtain Loan Approval is not received? The Contract states:
Loan Approval shall be deemed waived, in which event this Contract will continue as if Loan Approval had been obtained
The Court rationalizes that the appraisal was for a mortgage that had different terms than the mortgage required by the Contract. The “deemed waived” text is held to be a “legal fiction.” Without a loan having been obtained, there are no loan terms to be considered for Loan Approval.
There have been comments that the LaFont decision eviscerates the FR/BAR contract forms financing contingency. In response, it is suggested that the contract forms bear up well, that this decision impacts a specific set of circumstances, when a buyer proceeds without financing that meets the contract’s Loan Approval provision. A buyer might well consider the Lafont decision to render the Contract’s “deemed waived” language as meaningless unless the Loan Approval meets the exact terms of the financing contingency. The decision does not indicate whether the buyer made a conscious assumption of risk to proceed with the contract without the contract defined Loan Approval financing.
Moving forward, this decision highlights the importance of drafting contract terms to fulfill anticipated needs. A buyer may not be able to rely, at least on the terms of the contract as stated, on a Loan Approval appraisal requirement when the proposed loan does not meets that contracts terms. In essence, the failure to obtain a loan approval as defined in the contract renders the “Loan Approval provisions a nullity, not able to be relied upon, at least in reference to an appraisal condition.
If a loan appraisal condition is sought, as occurs frequently, and is sought to apply when the appraisal is for a loan that may have different terms from the defined Loan Approval, then the attorney drafting the contract may want to alter the “form” terms, including perhaps stating a minimum/maximum or range of numbers for the terms. At the same time the drafter(s) must be cognizant that a contract without sufficiently specific material terms may not be enforceable. The chair of the RPPTL Residential Real Estate and Industry Liaison Committee, Salome Zikakis noted that the FAR/BAR Comprehensive Rider “F. Appraisal Contingency” may be a vehicle to start to address this issue. There is also the separate matter of whether a loan “commitment” is actually an effective commitment to loan as provided in the contract.
Michael J. Gelfand
Real Property, Probate and Trust Law Section of The Florida Bar
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Note: This article is not legal advice. Statements and comments made are not those of The Florida Bar or the RPPTL Section
© 2019 Michael J. Gelfand
Michael J. Gelfand
Florida Bar Board Certified Real Estate Attorney
Florida Supreme Court Certified Mediator:Civil Circuit Court & Civil County Court
Fellow, American College of Real Estate Attorneys