Rhode Island’s highest court has considered whether it should order a seller to specifically perform a purchase agreement, even though buyer’s original financing fell through on the scheduled closing date.
Adebo Fafiyebi (“Seller”) owned two adjoining parcels of land that he had listed for sale. In February 2003, the Seller entered into an agreement with Gbenga Lajayi (“Buyer”) to purchase both lots. The purchase agreement contained a paragraph setting forth various financing contingencies. The Buyer could get out of the purchase contract if he was unable to obtain financing which met certain terms, so long as he complied with conditions within the purchase agreement. One of the contingencies was that the Buyer had to submit a mortgage commitment letter from a lender by April 30, 2003. Failure to do so allowed the Seller to cancel the purchase and keep the Buyer’s deposit. The closing date was set for May 9, 2003, but the agreement did not include a “time is of the essence” clause. The Buyer did not submit a mortgage commitment letter to the Seller by April 30th.
On May 9th, the Buyer’s lender contacted the Seller’s real estate professional to let him know that the lender could not close on that day because the Buyer’s mortgage insurance had not been approved. The parties talked about rescheduling the transaction, but nothing was finalized. Later that day, the Buyer’s loan application was rejected by the lender.
On May 10th, the Buyer went to the Seller’s real estate professional’s office and signed two extensions: one extending the closing until May 23rd, and the other leaving the closing date blank. The Seller never signed either extension.
On May 12th, the Buyer applied to Direct Homes Mortgage (“Direct”) for financing his purchase of the two properties. The Buyer received a mortgage commitment letter from Direct on May 15th. Direct informed the Seller’s real estate professional about its loan commitment. Direct issued commitment letters for the two properties on May 19th, at which time the Seller’s real estate professional informed him that he wasn’t sure that the Seller was interested in completing the transaction.
The Buyer wrote to the Seller, demanding that the closing take place on May 30th. The Seller’s real estate professional responded to the Buyer’s demand by informing the Buyer that the Seller would not appear at the closing and considered the deal terminated. The Seller subsequently sent a letter to the Buyer on May 29th, stating that the Seller considered the deal terminated.
The Buyer brought a lawsuit seeking specific performance of the purchase contract. The trial court agreed with the Buyer, ruling that because the agreement did not include a “time is of the essence” clause, the Buyer was only required to complete the transaction within a reasonable time period. The Seller appealed.
The Supreme Court of Rhode Island affirmed the trial court’s ruling. The court first considered the trial court’s determination that the financing provisions in the purchase contracted existed solely to benefit the Buyer and so could be waived by the Buyer. Looking at the financing provisions, the court disagreed with the trial court’s determination, as the court found that the financing paragraph was of mutual benefit to both parties. While the financing provisions allowed the Buyer to escape the purchase agreement if he was not able to obtain a loan meeting certain conditions, the financing provisions also allowed the Seller to cancel the agreement if the buyer failed to meet certain deadlines. Thus, the court found that the financing provisions contained benefits for both parties.
Despite the fact that the court disagreed with the trial court’s interpretation of the financing provisions, the court found that the Seller had waived his ability to enforce the financing provisions which benefited him. The financing provisions required the Buyer to provide notice by April 30th of his obtaining a mortgage commitment, which the Buyer had failed to do. However, the Seller did not object to the Buyer’s failure to comply with this provision until after May 9th, by which time the purpose of the mortgage contingency clause had passed. Thus, the court ruled that the Seller had waived his ability to enforce those provisions in the purchase agreement.
Next, the court considered whether the Buyer was entitled to specific performance of the purchase agreement. In real estate contracts, prior cases had stated that a transaction is not required to occur at the exact time mentioned in the purchase agreement because delays frequently arise in these transactions. Looking at the evidence, the court agreed that the Buyer was entitled to specific performance. The court found that the Buyer had diligently obtained alternative financing within ten days after his original financing had been unexpectedly rejected on May 9th. The Seller had also not attempted to formally terminate the transaction until May 29th. Since the Buyer had been “ready, willing, and able” to perform the purchase contract, the court ruled that the Seller’s cancellation letter was nullity and the Buyer was entitled to specific performance. Thus, the court affirmed the trial court’s award of specific performance to the Buyer.
Lajayi v. Fafiyebi, 860 A.2d 680 (R.I. 2004).
Editor’s Note: Legal Affairs would like to thank Monica Staaf, Legal Counsel for the Rhode Island Association of REALTORS®, for alerting to us to this decision.