What is a financing condition?

Most property purchase contracts include a financing condition. This is a resolutive condition that allows a buyer to dissolve a purchase agreement if they fail to secure financing. The condition is valid for a limited period only. If the buyer does not invoke the resolutive condition within the specified timeframe, they are bound by the purchase agreement.

Invoking the financing condition

A buyer cannot always successfully invoke the financing condition if obtaining financing fails. They must demonstrate that they made a serious effort to secure financing. The buyer has an obligation to make sufficient efforts in this regard. The text of the financing condition often specifies that the buyer must invoke it in a ‘well-documented’ manner. A ‘well-documented’ invocation means that the buyer must, at a minimum, provide the seller with one rejection letter from a bank.

If a buyer regrets the purchase, they cannot simply ‘produce’ a rejection letter and use the financing condition to get out of the purchase agreement. For this reason, purchase agreements often specify the maximum amount of financing for which the buyer may apply.

Legal proceedings over the financing condition

If the seller believes that the buyer should not have dissolved the purchase agreement based on the financing condition, they may initiate legal proceedings. This often occurs if the seller thinks that the buyer did not make sufficient efforts to secure financing or that the buyer should have known before entering into the purchase agreement that financing was not feasible.

In such cases, the seller may claim that the buyer must pay the contractual penalty, typically 10% of the purchase price, or cooperate with the transfer of ownership. (To claim the penalty, the seller must first send the buyer a notice of default.) It can sometimes be difficult to predict in advance whether such proceedings will be successful. The following cases illustrate this.

A rejection letter is sometimes not enough

The Court of Appeal in Den Bosch ruled that buyers could not invoke the financing condition despite presenting a rejection letter from the bank. The mortgage lender had rejected the loan application because certain documents necessary for the mortgage were missing. The court held that the fact that the buyers did not have these documents available was their responsibility.

According to the court, the buyers should not have entered into the purchase agreement without making a condition regarding these essential documents. This case demonstrates that a buyer should not enter lightly into a purchase agreement and must consider in advance whether financing is possible and whether they have all the required documents available.

Invoking the financing condition when a permanent employment contract is lacking can succeed

Does the absence of documents such as a permanent employment contract and an employer’s statement prevent a buyer from invoking the financing condition? Not always, according to the Court of Appeal in Amsterdam in a case where buyers could not obtain financing because an employment contract was expiring. The court found that the buyers could not be blamed for being honest with the bank about the impending end of the employment contract; such openness was, in fact, expected of them.

A statement from a new employer could not be provided because there was no new employer yet. This impossibility did not mean that the buyers should not have entered into the purchase agreement, as it was not established that a mortgage would be impossible due to the job change.

On the contrary, correspondence from a bank showed that it was willing to explore an alternative by classifying the buyer as a ‘flexible worker’. If a buyer can demonstrate that the bank is willing to be flexible regarding the absence of a permanent employment contract and employer’s statement, their employment situation does not necessarily preclude entering into a purchase agreement or invoking the financing condition.

Late submission of a rejection letter does not always prevent the financing condition from being invoked

The late submission of a rejection letter to the seller does not always make it impossible to invoke the financing condition. The District Court of Rotterdam ruled that it was unreasonable to classify an invocation as late, even though the rejection letter was sent to the seller’s estate agent one day late. It was relevant that the buyer had already informed the seller several days earlier of their intention to dissolve the agreement, ensuring that the seller was informed in a timely manner.

In addition, the rejection letter had already been sent earlier to the seller’s financial adviser. Thus, failure to precisely meet all the requirements does not always prevent a buyer from invoking the financing condition.