A Condition to Closing Failed in Your Real Estate Transaction. What Happens Now?

By Priscilla Cervantes

When buying or selling real estate property, the purchase and sale contract will often include a number of buyer and seller conditions that must be satisfied before sealing the deal.  Typically, the buyer’s list of conditions precedent will be longer than the seller’s.  For example, the buyer’s obligation to close may be conditioned on obtaining financing and proper zoning for the intended use of the property.

So, what happens when a condition precedent fails (is not satisfied)?  Can you terminate the contract and do you lose your earnest money deposit if you’re the buyer?  Going back to one of the examples above, let’s suppose you’ve diligently sought financing but have been unable to obtain it by the closing date.  Simply put, unless you waive the condition precedent (e.g., because you have another source of funds), you do not have a contractual obligation to close and can walk out of the transaction and be entitled to a return of your earnest money deposit (unless there is a separate default).  But, there’s a caveat.  If the reason the condition precedent fails is due to a willful or intentional act or inaction, then you cannot rely on the failure of a condition precedent to terminate the contract.  For example, if you deliberately failed to seek financing because you were trying to get out of the contract, you may not use the failure of the condition precedent as an out.  The willful or intentional inaction could potentially rise to a default under the contract and/or subject you to a claim for breach of the implied covenant of good faith and fair dealing that is implicit in all contracts.  Same goes for the other party.  It cannot rely on the failure of a condition precedent if it caused the failure by impeding on your ability to satisfy the condition precedent to avoid the contract.

Remember that the closing conditions/conditions precedent are the final opportunity to allow you to walk out of the transaction and, as the buyer, to retain your earnest money deposit.  As the buyer, you want to ensure that each contingency related to your intended use of the property is resolved as a condition to closing.  As the seller, you want to ensure that you address any matters that must be resolved before you close (e.g. obtaining third-party consents) and closely review the buyer’s conditions to closing for reasonableness.