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July 18, 2017 • Stay Connected!
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QUESTION:  My seller's sale failed because of buyer's financing, but my seller believes that the buyer did not perform. About a week before the closing date, the buyers' lender sent this email:
"We are not ready to issue the closing disclosure as we are trying to figure out the co-borrower income. There is a huge discrepancy, as he stated his income is 26.01/hr, but his employer said 20.98/hr. Apparently, $5.03 is used to pay for his benefits. I left the employer a message this morning and texted the client also. In addition, when I pre-approved them, it was based on buyer's old job. He changed jobs in the last 4 weeks without informing me and that’s why I am caught off-guard."
Based on this email, seller believes that buyer should have informed his lender of the job change as soon as it happened. Lender could then tell both parties much sooner if buyer can still get approved for a loan. Buyer could have terminated the sale much earlier and this would have saved the seller the extra expenses he incurred by not closing as scheduled and seller would not have lost market time.
What happened instead was the closing date passed, and the buyer sent the rescission to seller about 4 days after the closing date, citing financing as the reason to terminate. Buyers claim that the financing contingency survives the closing date, but seller never gave a Termination Notice that is mentioned in Form 22A #3b. Seller believes that the Financing Addendum was terminated when the closing date passed, because we were out of contract.
In addition, seller an extension addendum to the buyer in an effort to stay under contract, with the condition that the earnest money be waived. Buyers did not sign this addendum. Is the seller correct to claim that buyers did not perform, that the sale failed through no fault of the seller, so that seller is entitled to get the earnest money as his sole remedy?

ANSWER:   The financing contingency does survive termination. The survival language means that even if buyer does not provide the Form 22A, paragraph 5, lender letter until after the closing date has passed, buyer is still entitled to recover the EM. Buyer is, however, required to provide the Form 22A, paragraph 5, lender letter. Additionally, buyer is not obligated to extend the closing date.
For future reference, this question presents a perfect illustration of why it is important for listing broker to advise seller to consider delivering the Form 22A, paragraph 3, Notice of Right to Terminate to buyer at seller's first opportunity to do so. There is no harm that can come to seller from delivering the Notice of Right to Terminate (buyer CANNOT terminate the transaction based on receipt) and seller will benefit from either having buyer waive the financing contingency or be alerted to the fact that buyer is uncomfortable in buyer's own ability to gain financing.
Assuming buyer provides the required lender letter, this question boils down to an analysis of good faith. Buyer was required to make a good faith effort to obtain financing. In light of the given facts, did buyer exercise good faith? If the answer to that question is yes, then buyer is entitled to recover the EM. If the answer to that question is no, then seller is entitled to recover the EM.
Unfortunately, there is no way that the Hotline lawyer or broker can answer this question for seller. Broker must advise seller, in writing, to seek legal counsel. If seller challenges buyer's right to recover the EM and the parties meet in court, it will be up to the judge, after hearing evidence from both sides, to determine the question of good faith. Seller should consult with seller's own lawyer for assistance in determining the pros and cons of proceeding with a challenge and the likelihood of success in any court proceeding.


The Legal Hotline Lawyer does not represent Washington REALTORS or its members. To browse through our database of past Q & A's, visit Attorney Annie Fitzsimmons writes the Legal Hotline Question and Answer of the Week. Please submit questions to . Please tell us your NRDS number when you e-mail the Hotline with your question.

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