Cooperatives & Condominiums

Co-Op Purchaser Entitled to Return of Down Payment Despite Applying for Larger Loan Then Contemplated

Gorgoglione v. Gillenson

NYLJ 1/17/08, p. 34, col. 2

AppDiv, First Dept. (memorandum opinion)

In an action by contract vendee of a co-op apartment for return of his down payment, contract vendee appealed from the Supreme Court's award of summary judgment to seller. The Appellate Division reversed and awarded summary judgment to contract vendee, concluding that he was entitled to return of the deposit when the co-op board failed to consent to the transfer, even though he obtained a higher loan commitment than contemplated by the contract of sale.

Contract vendee contracted to purchase the subject apartment for $850,000, $85,000 of which was paid to seller as a down payment. The sale contract made the sale contingent on approval by the co-operative corporation. It also provided that the contract was contingent upon issue to him of a loan commitment in the amount of $425,000 for a term of 30 years 'or such lesser amount or shorter term as applied for and acceptable to' contract vendee. Contract vendee applied for and obtained a loan commitment for $425,000, but rejected it and later obtained a second commitment for $552,000. Nine days later, the co-op corporation denied the parties' request for consent to the transfer. Contract vendee then gave notice that he was canceling the transaction and requested return of his down payment. Seller refused to return the deposit, contending that contract vendee had breached the contract by rejecting the $425,000 loan commitment and applying for a loan in a greater amount. Contract vendee then brought this action, the Supreme Court granted summary judgment to seller, and contract vendee appealed.

In reversing, the Appellate Division held that because contract vendee obtained a commitment in a larger amount, any deviation in his mortgage application from the terms of the contract did not provide grounds for declaring him in default because it was not a cause of the failure of the transaction. The court emphasized that seller had provided no evidence that the co-op's refusal to consent to the transaction was related to the amount of the loan commitment, and noted that the larger commitment was well within the co-op's guidelines, which allowed up to 75% financing. Because the transaction failed for reasons other than the financing terms, the purchaser's application for financing on terms different from those provided in the contract is not deemed to be a breach of his or her obligation to make a good faith effort to obtain financing.

COMMENT

Generally, a buyer breaches a contract for sale of real property and therefore is not entitled to recover the down payment if the buyer applies for a mortgage in an amount greater than the one required by the contract's mortgage contingency clause. Thus, in Post v. Mengoni, 198 A.D. 2d 487, the bank rejected buyer's application for a loan that was $100,000 in excess of the amount required under the mortgage contingency clause. There the court held that because the buyer's loan application did not conform to the contract, the buyer breached and was not entitled to recover his down payment. The court applied the same reasoning in Silva v. Celella, 153 A.D. 2d 847. There the buyers applied for a mortgage in the amount of $185,000, $10,000 greater than the amount required by the mortgage contingency clause, and were unsuccessful in their application for a mortgage commitment in that amount. The court held that the buyers breached the contract by applying for an amount greater than required and thus, were not entitled to recover their $15,000 down payment.

Where the buyer's application for a loan in excess of the amount contemplated by the mortgage contingency clause was not the reason for failure of the financial transaction, the buyer is entitled to recover the down payment. Thus, in Katz v. Simon, 216 A.D. 2d 270, the court held that the buyers were entitled to recover their down payment because the appraisal value of the property was too low to qualify for the loan required under the sale contract. Although the buyers applied for a loan in excess of the $203,000 conditioned by the contract, the bank indicated that the maximum it would have been willing to offer was $194,400. Therefore, the court concluded that the transaction failed not because the buyer applied for a loan greater than what the contract contemplated but rather, because the property's appraisal value was inadequate. Markovitz v. Kacian, 28 A.D. 3d 358, presents another example where the court found that the buyer was entitled to recover the down payment because the non-conforming loan was not the cause for the failure of the transaction. There the buyer applied for an acquisition/construction loan that was twice the amount specified in the contract. In rejecting the loan application, the bank stated the property was unable to support a loan even for the amount required by the contract.

In Gorgoglione, unlike in Post, the buyer's decision to apply for a loan greater than conditioned under the sale contract was not the reason for the failure of the transaction. As in Katz and Markovitz where the transaction failed because of a fact unrelated to the non-conforming loan, in Gorgoglione the transaction failed because of the co-op board's denial, not the fact that the buyer applied for a loan in excess of the amount specified in the sale contract and therefore, the buyer did not breach his obligation. Since it was conceded in Gorgoglione that the deviation from the contract's financing terms was not the reason for the co-op's refusal, it is unclear in co-op cases who bears the burden of proving that the transaction failure was caused by the buyer's application for an excessive amount.

Co-Op Purchaser Entitled to Return of Down Payment Despite Applying for Larger Loan Then Contemplated

Gorgoglione v. Gillenson

NYLJ 1/17/08, p. 34, col. 2

AppDiv, First Dept. (memorandum opinion)

In an action by contract vendee of a co-op apartment for return of his down payment, contract vendee appealed from the Supreme Court's award of summary judgment to seller. The Appellate Division reversed and awarded summary judgment to contract vendee, concluding that he was entitled to return of the deposit when the co-op board failed to consent to the transfer, even though he obtained a higher loan commitment than contemplated by the contract of sale.

Contract vendee contracted to purchase the subject apartment for $850,000, $85,000 of which was paid to seller as a down payment. The sale contract made the sale contingent on approval by the co-operative corporation. It also provided that the contract was contingent upon issue to him of a loan commitment in the amount of $425,000 for a term of 30 years 'or such lesser amount or shorter term as applied for and acceptable to' contract vendee. Contract vendee applied for and obtained a loan commitment for $425,000, but rejected it and later obtained a second commitment for $552,000. Nine days later, the co-op corporation denied the parties' request for consent to the transfer. Contract vendee then gave notice that he was canceling the transaction and requested return of his down payment. Seller refused to return the deposit, contending that contract vendee had breached the contract by rejecting the $425,000 loan commitment and applying for a loan in a greater amount. Contract vendee then brought this action, the Supreme Court granted summary judgment to seller, and contract vendee appealed.

In reversing, the Appellate Division held that because contract vendee obtained a commitment in a larger amount, any deviation in his mortgage application from the terms of the contract did not provide grounds for declaring him in default because it was not a cause of the failure of the transaction. The court emphasized that seller had provided no evidence that the co-op's refusal to consent to the transaction was related to the amount of the loan commitment, and noted that the larger commitment was well within the co-op's guidelines, which allowed up to 75% financing. Because the transaction failed for reasons other than the financing terms, the purchaser's application for financing on terms different from those provided in the contract is not deemed to be a breach of his or her obligation to make a good faith effort to obtain financing.

COMMENT

Generally, a buyer breaches a contract for sale of real property and therefore is not entitled to recover the down payment if the buyer applies for a mortgage in an amount greater than the one required by the contract's mortgage contingency clause. Thus, in Post v. Mengoni, 198 A.D. 2d 487, the bank rejected buyer's application for a loan that was $100,000 in excess of the amount required under the mortgage contingency clause. There the court held that because the buyer's loan application did not conform to the contract, the buyer breached and was not entitled to recover his down payment. The court applied the same reasoning in Silva v. Celella, 153 A.D. 2d 847. There the buyers applied for a mortgage in the amount of $185,000, $10,000 greater than the amount required by the mortgage contingency clause, and were unsuccessful in their application for a mortgage commitment in that amount. The court held that the buyers breached the contract by applying for an amount greater than required and thus, were not entitled to recover their $15,000 down payment.

Where the buyer's application for a loan in excess of the amount contemplated by the mortgage contingency clause was not the reason for failure of the financial transaction, the buyer is entitled to recover the down payment. Thus, in Katz v. Simon, 216 A.D. 2d 270, the court held that the buyers were entitled to recover their down payment because the appraisal value of the property was too low to qualify for the loan required under the sale contract. Although the buyers applied for a loan in excess of the $203,000 conditioned by the contract, the bank indicated that the maximum it would have been willing to offer was $194,400. Therefore, the court concluded that the transaction failed not because the buyer applied for a loan greater than what the contract contemplated but rather, because the property's appraisal value was inadequate. Markovitz v. Kacian, 28 A.D. 3d 358, presents another example where the court found that the buyer was entitled to recover the down payment because the non-conforming loan was not the cause for the failure of the transaction. There the buyer applied for an acquisition/construction loan that was twice the amount specified in the contract. In rejecting the loan application, the bank stated the property was unable to support a loan even for the amount required by the contract.

In Gorgoglione, unlike in Post, the buyer's decision to apply for a loan greater than conditioned under the sale contract was not the reason for the failure of the transaction. As in Katz and Markovitz where the transaction failed because of a fact unrelated to the non-conforming loan, in Gorgoglione the transaction failed because of the co-op board's denial, not the fact that the buyer applied for a loan in excess of the amount specified in the sale contract and therefore, the buyer did not breach his obligation. Since it was conceded in Gorgoglione that the deviation from the contract's financing terms was not the reason for the co-op's refusal, it is unclear in co-op cases who bears the burden of proving that the transaction failure was caused by the buyer's application for an excessive amount.