It is quite common for contracts for the purchase of real estate to include a term that the contract is “subject to finance” and that a party would use their “best endeavours”. Whilst such terms are often included they are rarely litigated. Even rarer is that such a matter would proceed to trial. The District Court of South Australia recently provided clarity on this topic.
Ms Fanoulis Stoilas and Mr Ioannis Tsogas were a young couple in their early 20s. They both worked as apprentices and lived at home with their respective parents. They were not paying board, had modest savings and negative credit history.
Adelaide lawyer Lorenzo Mazzocchetti was the owner of a house at Woodville West.
One Saturday in August 2010, Ms Stolias and Mr Tsogas entered into a contract to purchase the house. The contract was subject to finance and contained a clause requiring that the purchasers use their best endeavours to obtain a loan in the sum of $390,000 on or before 14 September 2010.
The purchasers paid a $10,000 deposit to the agent.
Taking into account the money they had and a gift that they had been promised the purchasers needed a loan of $390,000 to make up the purchase price. So off they went on the following Monday, trying to find a bank that would loan them the money to purchase the house.
The plaintiffs applied for a loan from the National Australia Bank. The plaintiffs provided all of the documents and information that the bank required. As part of the application a Bank employee determined that they would in fact need $405,000 taking into account costs and based on the bank’s standard lending criteria. The application was rejected.
The plaintiffs then made inquiries of other lenders. They approached Laiki Bank. They consulted an mortgage broker. They also contacted an officer of the Commonwealth Bank. On each occasion the plaintiffs were told that they would not be able to get the loan they needed in their current circumstances. It is apparent that the rejections were as a result of the plaintiffs’ financial background and capacity to service the loan rather than any failing in their efforts to apply for such a loan.
The mortgage broker suggested that the loan may be approved if the respective parents were prepared to guarantee the loans. The parents refused to act as guarantors.
The plaintiffs sought the return of their deposit.
Mr Mazzocchetti refused permission for the agent to return the deposit. Mr Mazzocchetti counter-claimed and argued that the plaintiffs’ had breached the contract in that they had not used their best endeavours to obtain a loan in the amount required. Further, he sued the plaintiffs for just over $50,000 in damages on the basis that he lost money when he later sold the house for less to another buyer.
Judge Boylan examined the concept of “best endeavours”. The notion of “best endeavours” required the plaintiffs to act honestly and reasonably. What is reasonable depends on the:
- capacity of the purchaser
- qualifications of the purchaser
- responsibilities of the purchaser
considered in the context of a particular contract. Further the Court found “parties bound by such a clause are not obliged to go beyond the bounds of reason or to obtain finance in terms unacceptable to them”. In that context, it was unreasonable to expect that the plaintiffs continue to seek out further lending institutions or alternatively require their respective parents become guarantors.
Orders were made requiring return of the deposit and dismissing Mr Mazzocchetti’s claim for damages.
The inclusion of “best endeavours” obligations in contracts can lead to ambiguity as to whether there has been compliance. It is very much dependent on the financial position of the purchaser and other matters which are not likely to be known by a vendor. As such, a vendor should proceed with caution when seeking to challenge a prospective purchaser in relation to such matters. Whether a vendor could attempt to minimise the flexibility available to a purchase by requiring the disclosure of financial information at the time of contract still may not be sufficient to overcome these issues.