Best of the Legal Hotline
by James L. Goldsmith, Esq.
FACTS: Buyer and Seller enter into an Agreement of Sale that is contingent upon the Buyer obtaining a mortgage. The terminal date for obtaining the commitment and delivering it to Seller was December 8. Unfortunately, issues arose in the mortgage application/review process and a commitment was not issued by the 8th.
Well before December 8, another prospective Buyer, willing to pay more money for the purchase of the property, entered the picture. It was the Seller’s intent to terminate his agreement with the first Buyer if that Buyer did not have his commitment in place by the mortgage commitment date.
On December 9, the Seller’s agent delivered a letter and release to the agent for the first Buyer. The letter stated: “Your Buyer has not obtained a mortgage by the commitment date. Please have him sign the enclosed Release and return it to me as soon as possible. I will have it signed by the Seller then return your client’s deposit.” According to the Buyer’s agent, his client would likely receive a good commitment within one or two days of having received the letter and release.
QUESTION: Has the Seller terminated the Agreement of Sale as a result of the Buyer’s failure to have a commitment by the terminal date for obtaining one?
ANSWER: The PAR Agreement of Sale is very clear when it comes to a Seller’s right to terminate an agreement when a Buyer has failed to timely produce a mortgage commitment. In that event, the Seller has the unilateral right to terminate the agreement “by written notice to Buyer.” In the absence of a written notice of termination, the mortgage commitment date is extended.
In this case, the Seller’s intent was to terminate the agreement and sell the property for the higher price to a second Buyer. The listing agent, however, did not unequivocally provide written notice that the agreement was terminated. A mutual release is not a notice of termination, but rather an agreement that requires the consent of both parties. A release is a mutual exchange of promises, generally in the nature of a waiver and relinquishment of all rights that the parties had under an Agreement of Sale. By signing a release, a Seller gives up his or her right to demand payment in full and the Buyer gives up a right to acquire title to the property. When only one party signs a release, no release has been achieved inasmuch as the form, by its very nature and intent, is designed to be an exchange of promises. What the listing agent did was nothing more than suggest that the parties reach a contract to undo their original contract!
The appropriate approach would have been for the listing agent to send a letter that clearly stated the Agreement of Sale is terminated pursuant to paragraph 6(D) because of the Buyer’s failure to deliver a written mortgage commitment by the mortgage commitment date.
What about return of the deposit? The law does not actually require that a release be executed by both parties before the deposit can be returned (a signed note by the Seller waiving entitlement to the funds may be sufficient for purposes of returning the deposit). A release is desirable because by signing the release, the Buyer acknowledges he/she has no further right to acquire the property. For that reason, every effort should be made to obtain a release, however, make certain that the note that accompanies the release clearly and unequivocally states that the agreement is terminated.
By the way, in the case that was presented to the Hotline, the Buyer agent held onto the release and did not have it executed by the Buyer. The Buyer was able to obtain an appropriate mortgage commitment and place it in the hands of a listing agent before the listing agent provided written notice of termination. The first Buyer acquired the property and the listing agent was left with egg on her face!
Mr. Goldsmith is a member of the law firm of Caldwell & Kearns in Harrisburg. In addition to serving as general counsel to PAR, Caldwell & Kearns represents brokers and salespersons in various legal matters.