Background
HCB Properties, LLC agreed to purchase property from Island Investments Incorporated for a total of $2.6 million. The purchase agreement made the transaction contingent on HCB obtaining financing by February 20, 2023, at an interest rate not exceeding 8%. It also required HCB to place two deposits totaling $250,000 in escrow and provided that all deposits would be returned if the buyer could not obtain financing.
HCB paid both deposits but later sought a mutual release after several banks declined to finance the property at the $2.6 million value. Although one lender approved a $1,622,727 loan at 7.45% interest, HCB maintained that the approved amount was insufficient to complete the purchase. Island Investments refused to release the deposits, arguing that HCB had obtained financing and had waived the contingency by making the second deposit. The circuit court granted summary disposition to HCB and denied Island Investments’ competing motion.
The Court’s Holding
The Michigan Court of Appeals affirmed. Reading the financing-contingency language in the context of the entire agreement, the court held that “financing approval” meant approval for financing sufficient to provide the $2.6 million needed to complete the transaction. The agreement did not state that HCB would supply part of the purchase price from its own funds, so HCB’s alleged plan to contribute $600,000 did not alter the contract’s plain meaning.
The court also rejected Island Investments’ argument that payment of the second deposit waived the financing contingency. The “financing preapproval” that triggered the second deposit was distinct from the final “financing approval” required to complete the transaction. Because HCB produced unrebutted evidence that it could not obtain sufficient financing, the agreement required Island Investments to return the deposits.
Key Takeaways
- A financing contingency must be interpreted in the context of the purchase agreement as a whole, rather than by isolating its interest-rate language.
- Where an agreement identifies the total purchase amount but does not specify that the buyer will self-finance any portion, financing approval means approval sufficient to complete the transaction.
- A buyer’s payment of a deposit following financing preapproval does not waive a separate final-financing contingency unless the agreement says so.
Why It Matters
The decision illustrates the importance of stating both the required loan amount and any anticipated buyer contribution in a real-estate financing contingency. It also shows that contractual references to “preapproval” and final “approval” may impose different obligations.
Sellers seeking to retain deposits after financing falls through must point to contract language supporting forfeiture or waiver. A preliminary loan approval for less than the amount needed to close will not necessarily satisfy a financing contingency.