Real Estate Finance Spring 2014 Dean Don Weidner Eight sets of slides for the Spring 2014 Are available on my web page Are also posted on the web blackboard for this course under Course Library May be amended slightly Course Syllabus Is posted on my web page and on the web Blackboard for this course under Syllabus Includes some basic material for those with no background Assignments We shall proceed directly though the Syllabus The slides will also take us directly through the Syllabus 1 Donald J Weidner Background on Contracts and Conditions Seller Listing Agreement Contract of Sale Broker Buyer Closing Interim Contract Seller Buyer Lender Consummation Closing of the Contract of Sale is subject to certain conditions which must be satisfied within a particular period of time usually involving a title b physical condition and c financing 2 Donald J Weidner Contract Conditions Text says conditions are essentially substitutes for information About legal title physical condition availability of financing Conditions may also be inserted by the buyer to postpone making a commitment Conditions range from the extremely general to the extremely specific Conditions may leave so much open that a contract arguably fails to satisfy the requirement of a writing under the Statute of Frauds Even if the Statute of Frauds is satisfied the contract may be too indefinite to support an award of specific performance 3 Donald J Weidner Illusory Contracts Since conditions will characteristically be phrased in general terms and their fulfillment left to the exclusive control of one of the parties there is the added question of illusoriness or mutuality of obligation Generally the problem is small for the concept of good faith goes far toward preventing reneging parties from using a financing title or other condition as an excuse for nonperformance 4 Donald J Weidner Illusory Contracts cont d On the excuse issue the text says In such cases the court will examine the motive of the party relying on the condition If a written contract gives me a right must I show that I am pure of heart before I may enforce it Not everyone thinks so Courts split on their role in applying the good faith requirement As we shall see in more detail Gap filler versus mandatory rule 5 Donald J Weidner Homler v Malas Text p 92 Seller sought to specifically enforce a buyer s promise to purchase a single family residence Contract on a standard form had a subject to financing clause that conditioned Buyer s performance on Buyer s obtaining a loan ability to obtain had been deleted For 80 of the purchase price Repayable monthly over a term of no less than 30 years However there was no mention of Interest rate left blank The amount of monthly payment left blank Amortization terms 6 Donald J Weidner Homler v Malas cont d Buyer said the contract is too vague and indefinite to be specifically enforced because the terms of the financing contingency are not sufficiently identified Other Georgia courts had said that a failure to specify a buyer s interest rate causes a failure of a condition precedent to the enforceability of the contract Seller said that there is no need to specify the interest rate in a contract that anticipates third party financing Can you see what the argument might be 7 Donald J Weidner Homler v Malas cont d Court said it is not as if the contract had specified interest at the current prevailing rate The contract assumed a search for third party financing Why not use the concept of good faith as a gap filler That is the concept of good faith would fill the interest rate gap by implying into the contract that interest would be at the current prevailing rate Stated differently the default rule the rule that would apply unless the parties specified a different rule would be that the unspecified interest rate is the current prevailing rate 8 Donald J Weidner Homler v Malas cont d How would you decide this case Court concluded the contract was too vague and indefinite to be enforced against the buyer and ordered the buyer s deposit to be refunded Why did the court refuse to use the concept of good faith to fill the interest rate gap Everyone agrees the buyer is under a duty to proceed in good faith The split is on what that means Does the strikeout suggest a different argument Mutuality of obligation is a separate issue from vague and indefinite and apparently in the eyes of the court an issue that was not raised Could Buyer have enforced the contract against Seller If not did the contract merely give Option to Buyer 9 Donald J Weidner Definitions of Good Faith Every contracting party is under a duty or obligation of good faith The question is what that duty requires UCC general definition honesty in fact in the conduct or transaction concerned Honesty to Webster uprightness integrity trustworthiness also freedom from deceit or fraud UCC definition for a merchant honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade Many statutes use the term good faith without defining it Some scholars say good faith is an excluder category one defined by what is deemed to be outside it rather than by what is in it 10 Donald J Weidner Liuzza v Panzer Text p 94 Contract to sell and to buy for 37 500 Buyer s obligation was conditioned upon the ability of the Buyer to borrow 30 000 00 on the property at an interest rate not to exceed 9 Buyer applied to an S L for a 30 000 loan and was rejected because the appraisal was too low S L appraisal was 32 150 S L would only lend 80 of the appraised value which was less than the 30 000 loan amount mentioned in the contract as a condition Can the Buyer walk away from the deal at this point Before refusing to close what more if anything must Buyer do to avoid breaching the Buyer s implied obligation to act in good faith 11 Donald J Weidner Kovarik v Vesely Text p 95 Contract provided for Buyers obligation to buy for 11 000 Buyers were to pay 4 000 down with the balance to be financed through a 7 000 purchase money mortgage from the Fort Atkinson S L Fort Atkinson S L rejected the Buyers Seller offered to provide 7 000 financing on the same terms that Buyers requested from Fort Atkinson Buyers refused the offer of Seller financing Seller sued to specifically enforce the contract Did the court correctly conclude that good faith required the Buyer to accept the Seller s offer of seller financing 12 Donald J Weidner Kovarik v Vesely cont d The majority