Mortgage financing contingency

You are experiencing a delay in obtaining a mortgage loan, and your preliminary sale agreement is subject to a financing contingency—

what should you do?

This situation does not necessarily imply fault on the part of the buyer or entitle the seller to compensation: It depends on the contractual terms and the efforts made to obtain a loan that meets the specified requirements. That is why it is crucial to carefully read and understand these contingency clauses.

The buyer must provide proof that they submitted loan applications—compliant with the terms of the preliminary agreement—within the contractual deadlines, and must inform the seller and the notary accordingly. Failure or delay on the part of the bank results in the agreement lapsing without compensation, with the return of any sums paid, where applicable.

Article L. 313-41 of the Consumer Code specifies:

Where the deed mentioned in Article L. 313-40 indicates that the price is paid—directly or indirectly, even partially—by means of one or more loans governed by the provisions of Sections 1 through 5 and Section 7 of this chapter, said deed is concluded subject to the condition precedent of obtaining the loan(s) financing the transaction.

The validity period of this condition precedent may not be less than one month from the date the deed is signed or, in the case of a private deed subject to mandatory registration (under penalty of nullity), from the date of registration.

 

If the condition precedent provided for in the first paragraph is not met, any sum paid in advance by the buyer to the other party, or on the latter's behalf, must be refunded immediately and in full, without any deduction or compensation of any kind.

Conversely, when the purchaser fails to fulfill their obligations to apply for a loan that complies with the terms— • within the timeframes and under the conditions set out in the preliminary agreement, • or if they fail to inform the seller without delay—

Example of a Court of Appeal ruling penalizing purchasers who applied for loans at rates lower than those stipulated in the preliminary agreement or for a non-compliant term:

"it is incumbent upon the purchasers to prove that they submitted a loan application complying with the precise characteristics stipulated in the deed";

the court held that by applying for loans at a lower rate (and thus harder to obtain) and for a non-compliant term, they prevented the fulfillment of the condition, which is consequently deemed fulfilled.

Article 1304-3 of the Civil Code sets out the consequences:

Article 1304-3 of the Civil Code: "A condition precedent is deemed fulfilled if the party with an interest in its fulfillment has prevented it from occurring. A condition subsequent is deemed to have failed if its fulfillment was brought about by the party with an interest in it."

• the condition is deemed fulfilled,

• the sale becomes binding and penalty clauses (such as the deposit/holding fee or a penalty proportional to the price) may be enforced, The judge may moderate these clauses in certain cases pursuant to Article 1231-5 of the Civil Code.

Article 1231-5

Where the contract stipulates that the party failing to perform it shall pay a certain sum as damages, the other party may not be awarded a higher or lower sum. Nevertheless, the judge may, even of his own motion, moderate or increase the penalty thus agreed upon if it is manifestly excessive or derisory. Where the obligation has been partially performed, the agreed penalty may be reduced by the court—even of its own motion—in proportion to the benefit the partial performance has yielded to the creditor, without prejudice to the application of the preceding paragraph.

Any provision to the contrary regarding the two preceding paragraphs shall be deemed unwritten.

Except in cases of definitive non-performance, the penalty is incurred only once the debtor has been formally put on notice.

Where the contract establishes a formal notice procedure following the expiration of the time limit for the fulfillment of a condition, a delay in initiating this procedure may neutralize any argument regarding the purchaser's fault.

Your case requires a precise analysis of the preliminary sale agreement...