CT Appellate Court affirms finding that buyers failed to exercise due diligence in seeking mortgage under contingency clause

Contracts for the sale of real property often contain mortgage contingency clauses. In this case, the mortgage contingency clause required the purchasers to apply for a mortgage commitment ”at the prevailing rate . . . and [to] pursue the same diligently.” The principal issue is whether the purchasers, having learned that they were ineligible for a mortgage at ”the prime rate,” were required to exercise due diligence to pursue alternate mortgage options. The trial court resolved this issue in favor of the vendors. The purchasers have appealed. We affirm the judgment of the court.

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The court found that the plaintiffs’ efforts to obtain a mortgage ”lacked due diligence and were unreasonable.” It observed that the bank never rejected the plaintiffs’ mortgage application, which was withdrawn ”after McCoy failed to pursue it further.” It found that the plaintiffs had failed to prove that they could not obtain a mortgage containing conditions appropriate to their circumstances. Accordingly, the court concluded that the defendants’ refusal to return the deposit was not a violation of the mortgage contingency clause in the contract and that they were entitled to retain the deposit as liquidated damages.

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Any mortgage contingency clause implies ”a promise that the purchaser will exert reasonable efforts to obtain a mortgage commitment.” Phillipe v. Thomas, 3 Conn. App. 471, 473, 489 A.2d 1056 (1985); see also Barber v. Jacobs, 58 Conn. App. 330, 335, 753 A.2d 430, cert. denied, 254 Conn. 920, 759 A.2d 1023 (2000). In this case, the mortgage contingency clause expressly required the plaintiffs to exercise due diligence. As in Phillipe, the language of the contract obligated the plaintiffs to use reasonable diligence in their efforts to obtain a mortgage commitment. ”Reasonableness . . . is an objective standard, involving an analysis of what a person with ordinary prudence would do given the circumstances, without accounting for any particular knowledge or skill. . . . Whether the plaintiff’s actions constituted reasonable efforts to satisfy the contractual condition is a factual determination for the trial court.” (Citations omitted.) Phillipe v. Thomas, supra, 475.

In this case, the court found that the plaintiffs had ”not exercis[ed] due diligence and reasonable care in [their] decisions regarding the acceptance of a mortgage as required by the broad mortgage contingency clause contained in the contract.” Clearly, McCoy wanted a mortgage with the ” ‘best rate’ ” of interest. He knew that he would not qualify for such a rate without salaried employment. The plaintiffs made their offer to purchase the property while McCoy was unemployed. McCoy sought the salaried job offer with Provation in the hope of securing the lower interest rate he desired. As far as the record shows, when the offer of salaried employment was withdrawn, McCoy abandoned all efforts to obtain a mortgage. Indeed, the bank never rejected the plaintiffs’ mortgage application, which was withdrawn after McCoy neglected to pursue it further.

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The crucial fact found by the court was that, even if Raia’s withdrawal of the offer of salaried employment at Provation would have disqualified the plaintiffs’ eligibility for a mortgage at a 6.25 percent interest rate, other mortgage options were open to the plaintiffs, which they could have pursued. McCoy’s unilateral decision to forego any inquiry into any financing alternatives amply supports the court’s determination that ”McCoy failed to exercise due diligence and [that he] was unreasonable in his decision not to consider another form of mortgage which may have carried a higher rate of interest.” We conclude, therefore, that the court properly found that the plaintiffs failed to exercise due diligence to secure a mortgage at the prevailing rate after they learned that they were ineligible for financing at their preferred rate. In light of this failure on their part, we agree with the court that the plaintiffs were not entitled to a return of the deposit on their contract for the purchase of the defendants’ property.

For more information on the case cited see http://www.jud.ct.gov/external/supapp/Cases/AROap/AP130/130AP529.pdf