Recent Court Decision Reiterates Importance of Mortgage Contingency Clause

A recent court decision, YPI 180 N. LaSalle Owner, LLC v. 180 N. LaSalle II, LLC (342 Ill. Dec. 879, 2010), reiterates the importance of the mortgage contingency clause in real estate transactions, whether large or small.  In that case, the Buyer put down $6,000,000 in earnest money towards the purchase of a commercial property with a contract sales price of $124,000,000.  The Buyer had arranged for financing from an Irish bank, who later pulled out of the transaction citing Irish and global economic issues beyond the bank’s control.  When the Buyer was unable to procure financing elsewhere, the Seller kept the earnest money.

Mortgage contingencies and earnest money are closely intertwined.  If a Buyer fails to timely notify the Seller of financing issues, then according to a typical mortgage continency clause, the Buyer may forfeit the earnest money.  When the buyers in the YPI 180 N. LaSalle Owner case did not receive their earnest money back, they filed suit, claiming that it was impossible to perform their end of the bargain because of the global economic crisis. 

The court disagreed.  Specifically, the court felt that the Buyer should have realized that an inability to obtain financing was a possibility all along.  Moreover, the court stated that the Buyer could have protected itself from such a situation by putting an appropriate contingency in place in the Contract.  The Buyer did not have an appropriate mortgage contingency in place.

Bottom line — mortgage contingencies are important, now more than ever with loans being denied right and left!