When is a commitment not a Commitment?

by Robert J. Smith on May 7, 2012

I’m a big Seinfeld fan. I remember an episode where Jerry reserves a rental car, but when he arrives at the rental counter he is told that there are no cars available. He expresses his dismay to the agent at the counter, saying “but I have a reservation. That means you are supposed to have a car for me.” She responds by telling him “I know what a reservation is.” He quickly retorts “I don’t think you do”, and admonishes her about how keeping the reservation is far more important than taking the reservation.

I recently had a similar experience with a client who is buying a coop apartment. Her Contract gave her a “financing contingency”, which means that if she is unable to get a loan commitment within 30 days from the delivery of the Contract, she has the right to walk away from the deal and get her full 10% Contract Deposit returned to her. On day 25, her bank issued a commitment. I then wrote to her to say that we needed to get an extension of her time to get a loan Commitment. She said “but I have a commitment”. My response, which I gave her without Jerry’s sarcastic flair, was “I don’t think you do.”

The standard form coop and condo contracts state that a “commitment” (small “c”) issued by a lender is not a Commitment (Capital “C”) for purposes of the Contract if it is conditioned on the completion of a satisfactory appraisal. This means that if a commitment is issued within the time period required by the Contract (usually 30-45 days), but the completion of a satisfactory appraisal is a condition to that commitment, this does NOT qualify as a Commitment under the terms of the Contract of Sale. Confusing, isn’t it?

In the event the appraisal condition is not met within the required time period, the impact on the Purchaser could be devastating. If the 30 day period expires and she has not obtained a Commitment, she runs the risk of losing the financing contingency, meaning that she forfeits her ability to walk away from the deal with her 10% Contract Deposit if the lender does not fund the loan. This could cost her the full amount of the Contract Deposit if she is unable to obtain financing for any reason, including a problem with the building, even if it has nothing to do with her, and she does not have sufficient funds to close.

So what can a Purchaser do to get the necessary protection? When the end of the loan commitment period is approaching, the Purchaser’s attorney should request an extension of the commitment period from the Seller’s attorney. In most cases, the Seller will agree, because after waiting several weeks with the apartment off the market, the Seller is fully invested in completing the transaction with the Purchaser. If the Seller rejects the request for an extension and the Purchaser has a Commitment, then the Purchaser can either cancel the Contract (and receive a full refund of the Contract Deposit) or move forward without the loan contingency. This is like walking on a tightrope without a net, because if the lender refuses to give the Purchaser a loan, once again for any reason, she will be forced to either pay cash for the apartment (which she likely is unable to do) or forfeit her 10% Contract Deposit. This is why it is crucial not to let the time to get a loan Commitment expire.

In the case I described above, I requested a two-week extension, which was granted. Had the appraisal come back lower than the purchase price, the amount of the loan would have been less than what she applied for, and the financing contingency would have allowed her to cancel the Contract and get her full 10% Contract Deposit back. Fortunately, the appraisal came back at the amount of the purchase price, and my client was issued a Commitment. She has now been Board approved, and we are now waiting for her lender to give her the all-important “clear to close”. More on that later.

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