Assignment of Mortgage Condition Precedent to Closing of Condo Unit Sale: Did Buyer Have Right to Cancel When Lender Failed to Agree to Assignment?

This was originally posted on the SGR Blog.

Contracts for the sale of real property usually contain so-called “conditions precedent” to closing. Contracts sometimes contain, as such a condition, a lender’s consent to the assignment of an existing mortgage on the premises. And, as a recent case illustrates, the failure of that condition raises a broad panoply of legal issues, in general, and contract-specific disputes, in particular.

Prosperous View LLC agreed to purchase a condo unit at 170 Mercer Street in Manhattan from 170 Mercer LLC for $6.7 million and paid the down payment of $350,000 (to be held in escrow). Prosperous contended that the sale was contingent on Prosperous being assigned an existing mortgage on the property. It argued that it complied with its obligation to apply for the mortgagee’s consent to assume the mortgage. And alleged that the mortgagee began demanding onerous provisions in order for the assumption of the mortgage to be finalized, including an additional security payment of $1 million to be placed on deposit for the life of the loan. Prosperous contended that Mercer refused to pay the additional cost of complying with that condition.

Prosperous acknowledged that the March 1, 2020 deadline to complete the assumption of the mortgage passed. Prosperous then requested the return of the down payment and canceled the contract. Prosperous maintained that Mercer’s refusal to return the deposit was not made in good faith. And pointed to a provision of the sale contract (paragraph 31A) which purportedly capped the expenses that could be incurred by Prosperous in connection with obtaining the mortgagee’s consent.

Prosperous moved for summary judgment, pointing out that Mercer had sued the lender (who refused to assign the mortgage) on the ground that the onerous conditions were demanded in bad faith. And claimed that, because the assignment was not completed by March 1, 2020, Prosperous was entitled to cancel the contract and to a return of the down payment.

In opposition, Mercer claimed that that the reason for the delay in getting the assignment of the mortgage was a material issue of fact which compelled denial of the motion.

On the merits, Mercer claimed that Prosperous failed to properly cancel the contract. And argued that Prosperous unjustifiably repudiated the contract despite the fact that the lender (mortgagee) was engaged in negotiations with Mercer.

In reply, Prosperous contended that the contract gave Prosperous the right to cancel on March 1, 2020, and that Mercer was trying to rewrite the contract.

The central question on the motion was whether Prosperous was entitled to cancel the contract when it did not obtain an assignment of the mortgage. Paragraph 31 of the contract provided that “It is a condition precedent to Seller and Purchaser’s obligations to close that Mortgagee consent in writing … to Purchaser’s assumption of the Existing Mortgage upon the sale of the Unit to Purchaser”.

The contract also stated that “Purchaser agrees to pay any and all fees, costs and expenses incurred in connection with obtaining Mortgagee’s Consent up to $11,162.50 and Seller shall pay any additional costs and expenses beyond said amount”. The cancellation provision of that section provided that “Either party may cancel this Contract upon written notice to the other if Mortgagee’s Consent is not obtained by January 31, 2020, which date may be extended by Seller to March 1, 2020 provided Purchaser is making a diligent good faith effort to obtain Mortgagee’s Consent. Escrowee will return the Down Payment to Purchaser if the parties do not secure Mortgagee’s Consent, provided that Purchaser has made a diligent good faith effort to obtain Mortgagee’s Consent and has performed its obligations under this Section. The Down Payment will otherwise be non-refundable”.

The Court found that the language of the contract did not provide a deadline by which Prosperous had to cancel the contract in the event that the lender did not assign the mortgage to Prosperous. In fact, the contract specifically stated that the contingency (to get the assignment) applied to both Prosperous and Mercer. In other words, neither Prosperous nor the seller had an obligation to close if the lender did not give its consent.

There was no dispute that the lender withheld consent. Instead, the facts submitted on this motion evidenced a lender making demands, including that Prosperous post $1 million as cash collateral for the loan. And Mercer admitted that it sued the lender based on that conduct; and the lawsuit was commenced on February 28, 2020 (before Prosperous canceled the contract). Accordingly, there was no issue of fact with respect to whether Prosperous made a diligent effort to obtain the lender’s consent.

Prosperous asserted, and Mercer did not sufficiently dispute, that Prosperous completed all the forms, negotiated in good faith with the lender, and simply did not want (or have the cash) to post an additional $1 million to assume the mortgage. And the contact specifically limited the amount Prosperous would have to pay in connection with the mortgage assignment to $11,162.50. It was unsurprising that Prosperous decided to cancel a contract where it was told it would have to come up with an additional $1 million on top of making a down payment for $350,000 and assuming a multi-million-dollar mortgage.

Mercer’s position that Prosperous waived its right to cancel the contract as of January 31, 2020, was without merit. Cleary, the parties kept negotiating after the January 31, 2020 date specified in the contract to obtain the lender’s consent. According to Mercer’s manager, negotiations were ongoing throughout January, February, and March 2020. Based on that affidavit, it was also clear that Mercer (at least through its actions) extended the deadline to complete the assumption to March 1, 2020, as provided in the contract.

But even if the deadline was January 31, 2020, the fact was that the parties did not include a deadline for cancellation in the contract of sale based on the lender’s refusal to assign the mortgage. While the Court questioned why the parties did not include a deadline for the cancellation, the Court enforced the provisions of a contract between two sophisticated parties. Even if the Court were to impose some sort of equitable deadline by which the parties had to cancel, the fact was that Prosperous canceled the contract on March 13, 2020, only 12 days after the March 1, 2020 deadline and only a month and a half after the original deadline.

This was a straightforward set of circumstances: the parties agreed to the sale of an apartment contingent on the assignment of the mortgage to Prosperous. It appears, according to all parties, that the lender imposed arduous conditions on the mortgage assignment. After months of negotiating, Prosperous decided it did not want to go forward and wanted the down payment back. The contract permitted that relief and Mercer did not raise an issue of fact in opposition.

Mercer’s suggestion that Prosperous repudiated the contract and instead tried to explore a 1031 exchange (a tax strategy) was beside the point. All that was required for Prosperous to be able to cancel the contract was 1) the lender’s failure to assign the mortgage to Prosperous and 2) Prosperous’s showing that it made good faith efforts to get the assignment. Nothing presented to the Court raised an issue of fact about either requirement.

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