The “Real estate opinion - Seattle Post Intelligencer”

Real estate opinion - Seattle Post Intelligencer

Posted: 05 Mar 2010 08:39 PM PST

Last month the NWMLS amended some of the most frequently used state-wide forms. This piece will address some of the changes to the financing contingency forms, and those related thereto.

Under the old financing addendum (Form 22A), after a period of 30 days (the default duration that could be changed) the buyer was to provide the seller with an updated letter of loan commitment. After that deadline, or the earlier receipt of such a letter, whichever was first, the seller could send a three day notice, in which time the buyer would need to waive the financing contingency or the agreement would terminate. Alternatively the seller could ask for updated letters every 5 days. As a practical matter, this seldom occurred. Even the updated letter of loan commitments were seldom requested. And the reason was the seller typically wants the sale to go through. Absent some concern about the buyer, all of this was ignored.

The new rule does away with the letter of loan commitment. Now Form 22A provides that at any time after a period of 30 days (again the default duration that can be changed) the seller can send a "Right to Terminate" notice indicating that after 3 days they can terminate the agreement by sending a termination notice. Form 22A specifically references using Form 22AR for this purpose. The buyer can avoid the seller having the right to terminate by waiving the "financing contingency" within that 3 day period. Form 22A does not specify what form should be used for this purpose. If the financing contingency is not waived, then the seller can terminate at any time by sending a termination notice. Form 22A says that Form 22AR can be used for this purpose.

This is where the problems arise. Note that Form 22A does not specify the form that the buyer should use to waive the financing contingency. Also amended at the same time as Form 22A were Form 22AR and Form 22AW. If Form 22AR is used, the buyer merely states: "Buyer waives the financing contingency set forth in the Financing Addendum (Form 22A)." Form 22AW has the same language, but adds: "Paragraph 6 of the Financing Addendum (Appraisal Less Than Sales Price) survives Buyer's waiver of the financing contingency. . . . Seller may not terminate the Agreement under Paragraph 2 of the Financing Addendum (Seller's Right to Terminate)."

This is very problematic. Seemingly what was intended was to offer the buyer a choice to waive the financing contingency and the appraisal provisions, or merely waive the financing contingency, but not the appraisal provisions. The problem is, Form 22A doesn't say that the the buyer can use either Form 22AR or Form 22AW to deal with the seller sending a Right to Terminate notice. Absent saying that, the seller has not consented to the limited waiver of Form 22AW, assuming that Form 22A even requires the appraisal provisions of Form 22A to be waived. Arguably, if not probably, all that is required is that the buyer waive what is waived in form 22AW. And arguably, if not probably, what is waived by using Form 22AR is exactly the same as what is waived by using Form 22AW. Personally I don't understand why anyone would think that Form 22AR would waive the appraisal provisions of Form 22A. The main reason to think that is simply that both Form 22AR and Form 22AW were created at the same time. The only other thing would be that paragraph 8 of Form 22A, pertaining to an extension of time for Reg. Z does contain a provision indicating it survives the waiver of the financing contingency, but presumably a lot of the other paragraphs of Form 22A survive too. The problem is, the result is simply not clear because Form 22A is not clear.

[Edit: After talking/corresponding with several attorneys, I believe now that what was intended was that the buyer using Form 22AR to respond to the seller, and that the form would waive both the financing contingency and the appraisal provisions of Form 22A. I doubt the courts would rule that way on any consistent basis, but that's what was intended. And despite Form 22AW being drafted as a notice, it was intended to be a negotiated amendment to the contract, with the seller needing to sign off on it. The remedy to end any confusion to and obtain the intended results would be relatively simple. First, a sentence should be added to Paragraph 6 of Form 22A indicating that paragraph does not survive the waiver of the financing contingency. Second, Form 22AW should be amended such that it's drafted as an amendment to the contract, with a place for the sellers to sign, as opposed to initial.]

So where does that leave us? If a buyer uses Form 22AR, then arguably they have waived the appraisal provisions of Form 22A. Personally I don't think that they have, but why would they want to take that risk? If the buyer uses Form 22AW, then arguably they haven't done enough to comply with Form 22A, and the seller could terminate the agreement. Again, why would a buyer want to take that risk?

While I don't want to suggest what others should do, I will tell others what I intend to do as of this point in time. Until there is better guidance on this matter, my offers on behalf of buyers will also include the new form 22AA. That form has the same basic appraisal provisions of Form 22A. It was intended to be used for a cash buyer, but there is no reason it has to be so limited. Then what I would do is in the unlikely event a seller sends a Right to Terminate notice, I would use Form 22AR to waive the financing contingency. Since the appraisal provisions of Form 22AA are not part of any financing contingency form, presumably they would survive. The point is, eliminating the uncertainty created by the new forms would require your original offer contain an additional form. [Edit: Assuming the forms are some day amended to clarify the result as suggested above, I would still continue to use Form 22AA for buyers, because I don't believe most buyers would want to risk losing their earnest money if the appraisal came in low and they couldn't otherwise perform.]

Finally, as a side note, I've complained in the past that the powers that be never request public comment on forms before they make forms changes. I come from a different world, where even judges ask for public comment before they change the rules. They do that because public comment improves the final product. I think it's time that the powers that be for our form changes realize that too. Yes it would take more work for them to review comments, but a lot is at stake with the use of the statewide forms.

Note: This piece is not specific legal advice and is merely one person's interpretation of the new forms. As noted in the piece, there is a lot of uncertainty as to exactly how the forms work. To the extent anyone wants legal advice regarding the forms, they should consult their own attorney.

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