Florida Appellate Court Muddles FAR/BAR’s Finance Contingency Putting Escrow Deposits at Risk

In Florida, most residential real estate transactions utilize the form FAR/BAR Residential Contract for Purchase and Sale (“FAR/BAR Contract”). With over five million residential closings in Florida each year, the terms of the FAR/BAR contract impacts millions of transactions. Recently, the Fourth District Court of Appeals, in Florida Inv. Group 100, LLC v. Lafont, Case No. 4D18-2075 44 Fla. L. Weekly D 1063 (Fla. 4th DCA April 24, 2019), upended the real estate industry’s assumptions as it relates to the FAR/BAR contract and its finance contingency.

FAR/BAR Finance Contingency Clause

In 2017, the Florida Bar and Florida Realtors made significant changes to the FAR/BAR Contract. One such change was to the finance contingency, which replaced the phrase “loan commitment” with “loan approval.” As changed, the FAR/BAR Contract required the buyer to inform the seller in writing prior to the expiration of the loan approval period if they were unable to obtain loan approval. Within three days after receiving such notice, the seller had the option to cancel the contract and return the escrow deposit.

However, issues arise when lenders issue loan approvals with conditions because they did not obtain appraisals or confirmed other requirements for final loan approval during the finance contingency period. In essence, lenders treated loan approvals as if they were loan commitments. Unaware of the impacts of the 2017 changes, buyers and their agents assumed they could cancel a contract after the contingency period and recover the deposit if the appraisal came in under the contract price and the lender refused to lend.

Florida Inv. Group 100, LLC v. Lafont

This case arose out of the buyer’s efforts to recover her deposit on a residential real estate transaction that failed to close after the appraised value of the property was insufficient to allow the buyer to borrower funds under an approved loan with different financing terms than those in the contract.

The buyer and seller entered into an “AS IS” Residential Contract for the Sale and Purchase of real property in the amount of $620,000.00. The buyer made a deposit of $62,000.00. The contract set the closing date for June 15, 2017. The contract was contingent upon the buyer obtaining approval for a conventional loan within a “Loan Approval Period” of 30 days after the contract’s effective date, in the amount of $465,000.00 at a fixed interest rate for a term of 30 years. The contract required the buyer to use good faith and diligent effort to obtain “Loan Approval,” which the contract defined as: “approval of a loan meeting the Financing terms.” Further the contract required the buyer to “promptly deliver written notice” of such approval to the seller.

The contract further provided if the buyer was unable to obtain Loan Approval at any time prior to the expiration of the Loan Approval Period the buyer was to notify the seller in writing and elect to either waive Loan Approval or terminate the contract.   The contract further stated if the buyer failed to timely deliver either notice of approval or non-approval prior to the expiration of the Loan Approval period, then “Loan Approval shall be deemed waived, in which event this Contract will continue as if Loan Approval had been obtained.”

The contract further carved out an exception as to the appraisal. The contract specifically stated that if the Loan Approval has been obtained or deemed to have been obtained and Buyer fails to close then the Deposit shall be paid to Seller unless failure to close is due to “appraisal of the Property obtained by Buyer’s lender is insufficient to meet terms of the Loan Approval …”

The buyer submitted a loan application to a lender for terms other than those specified in the contract. The buyer received conditional approval in that the loan to cost ratio could not exceed 80%. The buyer never obtained Loan Approval as defined in the contract. The buyer also did not provide written notice to the seller, prior to the expiration of the Loan Approval period that she was unable to obtain Loan Approval.

After expiration of the Loan Approval period the lender that conditionally approved the buyer hired an appraiser that determined that the property’s market value was $485,000.00 which was $135,000.00 less than the purchase price. The lender subsequently sent the buyer a formal letter informing her that because the appraisal of the property came in substantially below the purchase price, the lender was unable to fund a mortgage for the purchase of the property, despite the buyer’s loan application being otherwise approved.

After expiration of the Loan Approval period the buyer’s real estate agent sent the seller a proposed Release and Cancellation of Contract, seeking to cancel the contract and to instruct the escrow agent to disburse the deposit to the buyer. The buyer failed to close on the closing date. The day after the closing date specified in the contract, the seller’s counsel sent a letter to the escrow agent asserting that the seller was entitled to the deposit.

The buyer filed a complaint against the seller for breach of contract. The buyer acknowledged that the Loan Approval was deemed waived because she did not provide written notice as required by the contract but the buyer alleged that the appraisal of the property obtained by her lender was insufficient to meet the terms of the “Loan Approval.” Therefore, the buyer was entitled to be refunded the escrow deposit and be released from any further obligations under the contract. The trial court ruled in favor of the buyer.

The issue presented on appeal was whether the buyer, who never obtained “Loan Approval” as defined in the contract, was excused from performance of the contract where the appraisal of the property was insufficient under a proposed loan transaction that did not meet the financing terms required for Loan Approval. The Fourth District Court of Appeals overturned the lower court’s decision finding that the plain language of the contract did not excuse the buyer’s performance because there was never an appraisal of the property obtained by the buyer’s lender that was insufficient to meet the terms of Loan Approval as defined in the contract.

The Court recognized that the parties defined “Loan Approval” in the contract itself, therefore the contractual definition controlled. Applying the contractual definition of Loan Approval in the contract, the Court found that the appraisal clause would only be triggered if the buyer had applied for a loan for the terms specified in the contract. Since the buyer never applied for the loan terms specified in the contract then the buyer could not rely upon the clause “appraisal of the Property obtained by Buyer’s lender is insufficient to meet terms of the Loan Approval” to cancel the contract.

This decision highlights the importance of drafting contract terms to fulfill anticipated needs of the transaction. The lesson that we should all take away from this case is if you take the time to include specific financing terms under the finance contingency section of a real estate contract the buyer should apply for a loan under those terms and always adhere to deadlines specified in the contract.