ORLANDO, Fla. – What’s a defined term? While it’s always possible to look up a definition in a dictionary, it’s also possible to give a word a unique definition that applies only within the confines of a specific contract. Contract drafters usually identify a defined term by capitalizing an otherwise commonly used word to signal that it has its own contract-specific definition. Let’s take, for example, the word property.

In standard context, the noun property is not capitalized. However, in this contract it is. The third line of the contract provides, “Seller shall sell and Buyer shall buy the following described Real Property and Personal Property (collectively ‘Property’).”

Of course, now you must look up the definition of Real Property and Personal Property (notice that they’re capitalized), which are found in the first paragraph of the contract. Real Property is all the land located within the legal description, “together with all existing improvements and fixtures…” unless the parties exclude any of the improvements or fixtures from the sale. Personal Property includes all the listed items owned by the seller and existing on the property as of the effective date (range(s)/oven(s), refrigerator(s), dishwasher(s), etc.) plus any additional items the parties add to the standard list. This “Property” provides a precise definition of what the buyer will get at closing.

Precision is crucial

If it looks like a lot of work to be precise about contractually defined terms, it is. But it’s important to be precise, since not understanding the right definitions can lead a party to suffer consequences of not understanding what a defined term means.

There are five terms specific to the financing contingency:

1. “Loan Amount”

The Loan Amount is a specific number. Section 2(c) is where the parties negotiate the Loan Amount, which is either a dollar amount or percentage of the purchase price. The precise Loan Amount is important, since it ties into the next defined term, Financing.

2. “Financing”

Financing means all the terms of the loan a buyer must apply for. These are specific terms, so the buyer needs to apply for a loan that meets all these criteria.

• Loan Amount
• Conventional, FHA, VA, or other (whichever box is checked)
• Fixed, adjustable, or fixed or adjustable rate (whichever box is checked)
• Initial interest rate not to exceed              % (if blank, then prevailing rate)
• Term of                  years (if blank, then 30)

3. “Appraisal”

Most lenders will require some form of appraisal, so this has been added to the financing contingency. The definition of “Appraisal” is “…an appraisal or alternative valuation of the Property satisfactory to the lender, if either is required by lender, which is sufficient to meet the terms required for lender to provide Financing for Buyer and proceed to Closing.

Note that there’s no set amount the appraisal needs to hit. The amount of an appraisal isn’t the key factor – the question is whether the lender has everything they need (if anything) to move forward.

4. “Loan Approval”

The definition of “Loan Approval” is “approval of a loan meeting the Financing and Appraisal terms…” This definition refers us back to the two defined terms we just reviewed, Financing and Appraisal. The loan that gets approved needs to check all the Financing boxes (amount, type, rate, and term), and the lender also needs to be satisfied with their appraisal or alternative valuation (deciding not to obtain one is treated the same as getting a satisfactory appraisal).

There is some confusion about whether a Loan Approval can have conditions. The definition of Loan Approval doesn’t offer much insight, but there is a brief phrase later that indicates the answer is yes. The phrase is “Property related conditions of the Loan Approval have not been met…”

If the buyer receives Loan Approval, the buyer “shall notify Seller of same in writing prior to expiration of the Loan Approval Period.” There is no form for this notice, so the buyer (or their attorney, broker, or associate) will need to send a letter, email, or fax to the seller (or the seller’s attorney, broker, or associate) to satisfy this requirement.

5. “Loan Approval Period”

The Loan Approval Period is the buyer’s deadline to cancel the contract if the buyer doesn’t yet have Loan Approval, or if the application is denied. The parties can negotiate the deadline, and it’s 30 days if left blank.

The end of the Loan Approval Period is an important inflection point, so it’s worth running over the buyer’s options if they don’t have Loan Approval.

• Option 1: The buyer can cancel the contract by sending a letter, email, or fax.
• Option 2: The buyer can send a letter, email, or fax informing the seller that they don’t have loan approval but are satisfied that they will be able to obtain it before closing.
• Option 3: If they neglect to send either of the notices described above, “then Buyer shall proceed forward with this Contract as though Paragraph 8(a), above, had been checked as of the Effective Date…” Note that once this happens, there is no protection for the buyer. The contract will treat the transaction as if it’s been a cash transaction with no financing contingency from the effective date. Additionally, the seller will have an optional three-day window after the Loan Approval Period expires to cancel the contract.

Click here to read Analyzing the Financing Contingency (Part 1 of 2)

Joel Maxson is Associate General Counsel

Note: Information deemed accurate on date of publication

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