The Appellate Division of the New Jersey Superior Court, in a decision announced June 16, 1998, has overruled a previous lower court ruling, and held that a lender's refusal to fund a mortgage loan due to a change in financial circumstance on the part of the prospective buyer, after a mortgage commitment was issued, but prior to closing, did not give the buyer the right to rescind the agreement, and obtain a return of their deposit. In 1988, the Law Division of the New Jersey Superior Court had permitted an individual who was terminated from his employment after he receive a mortgage commitment, to cancel the agreement of sale, and recover a substantial deposit that he had paid to a builder, on the basis that the mortgage contingency had not been satisfied.
On virtually identical facts, the Appellate Division refused to interpret what appears to have been a conventional preprinted agreement of sale to permit the buyers to obtain a refund of their deposit, when the husband was laid off from employment four days prior to the date scheduled for closing. In doing so, the Court found that the interpretation sought by the buyer would "place the parties in an intolerable state of limbo until the closing is finally consummated...Confusion and uncertainty can only result from extending, as a matter of law, the mortgage contingency clause to the date of closing."
The Court also mentioned recent caselaw that casts doubt on the enforceability on the "liquidated damages" provision in typical agreements of sale.
Since most conventional mortgage commitments contain a requirement that the borrower's financial condition not change substantially between the time the commitment is issued, and the date the loan is funded, this ruling creates additional risk for prospective home buyers, who should probably insist on certain modifications to most standard agreements of sale that are currently in use, in order to provide additional protection. Questions about this important case should be directed to Thomas A. Clark, Esquire.