Brief Fact Summary. Defendants agreed to an offer to purchase two commercial properties, but they were unable to obtain financing for both of the properties. The Plaintiff sued to recover $5,000 due under the promissory note.
Synopsis of Rule of Law. In cases when the meaning of a contract term, such as the term at issue here, can be found from the circumstances surrounding the execution of the contract, the courts will find that the contract is sufficiently definite. Otherwise, the contract will fail for a lack of definiteness.
A subject to financing clause creates a condition precedent to the buyer's performance.View Full Point of Law
Issue. Does the “subject to financing” clause in the offer to purchase prevent the recovery of the $5,000.00 due on the promissory note?
Held. Yes. Judgment affirmed.
The court first had to determine if the clause made the contract sufficiently definite. The court found that courts are not inclined to strike down such a contract for uncertainty if the deficiency can be supplied consistent with reasonableness in the interest of preserving the contract, which the parties thought they made.
However, the court found that this contract term (“subject to financing”) was uncertain in the following aspects: the Defendants in requesting such a term did not believe that they would have any trouble obtaining financing; the parties did not have in mind the limitations instituted by area banks by lending only 66 and 2/3 of the total price of a commercial property; the parties were not sufficiently definite in the amount of financing required; and the Defendant did not know that he could not obtain the financing personally, due to his bank’s policy of not lending any individual an amount in excess of $100,000.00.
The court did not reach the question of whether the Defendants acted in good faith because the contract failed for indefiniteness and thus, the Plaintiff cannot enforce any rights under the contract.
In cases when the meaning of a contract term, such as the term at issue here, can be found from the circumstances surrounding the execution of the contract, the courts will find that the contract is sufficiently definite. Otherwise, the contract will fail for a lack of definiteness. Circumstances which tend to lend definiteness to a “subject to financing” term are that the parties intended to obtain a certain loan in a certain amount, or on such terms as the buyer in good faith considered necessary for his purposes.
Discussion. Under the rule in this case, and in good practice, whenever an offer to purchase is conditioned on the buyer obtaining financing, it would be wise to specify what amount of financing is required, what type of financing is acceptable, how long the purchaser has to obtain the financing, and so on. The key being to make sure all the essential terms of the contract are definite.