Can the Current Financial Crisis Be a Blessing in Disguise for Condo Contract Holders Scheduled to Close?

February 4, 2009 by Lucas Lechuga

Last Friday, I had the pleasure of having lunch with Jared Beck and Elizabeth Lee Beck of the business litigation law firm, Beck & Lee.  Jared Beck, who pens The Magic City Harvard Lawyer blog, raised an interesting question: Can contract holders of condos in Miami scheduled to close in the coming months use the current financial crisis and inability to acquire financing as a valid argument for nonperformance of their contractual obligation?

I know, I know…preconstruction condo contracts clearly state that performance is not contingent upon financing.  However, a recent federal ruling in Hoosier Energy Rural Electric Cooperative, Inc. v. John Hancock Life Insurance Co., contains language that may assist condo contract holders who are scheduled to close in the near future.

Here’s some background on the federal case, as provided by Jared Beck’s recent blog post entitled, “Federal Court Endorses Financial Crisis As Basis For Relief From Pre-Existing Contractual Duties; Could Real Estate Contracts Be Affected?”:

The background is somewhat complex but essentially involves the owner of an electrical generating plant in Indiana, Hoosier Energy, which in 2002 entered into a complex lease-back arrangement over some of its assets with an insurance company, John Hancock, aimed at creating a tax shelter for John Hancock.  As part of the deal, Hoosier Energy was required to obtain what amounted to a line of credit from Ambac,  a financial institution called a “swap provider.”

Until 2008, Hoosier Energy made all of its scheduled payments under the agreement.  Then, global financial crisis ensued, and the credit rating of Hoosier Energy’s swap provider sunk like a stone.  Hoosier Energy was unable to find another swap provider with a suitable credit rating who could be substituted in a timely manner.  John Hancock declared Hoosier Energy to be in default and demanded a large termination payment, shortly after which Hoosier Energy filed suit, requesting a protective injunction.

Mr. Beck went on to say in his blog post that “Hoosier Energy argued that the extraordinary freeze in the global credit markets at least partially excused it from performing under the contract as an instance of ‘commercial impracticability,’ mitigating the default declared by John Hancock”.  The court agreed with Hoosier Energy’s argument.

Mr. Beck concluded his post with the following:

How could this newly articulated doctrine be more broadly applied? One possibility rests with the large number of individuals who signed preconstruction real estate contracts several years ago, with the intention of obtaining mortgage financing once the project was finished. Now that many of those projects have been or will soon be competed, those buyers are unable to close because, owing to the global credit crunch, banks will no longer extend mortgage financing for certain new real estate construction at 2004 or 2005 prices.

While many of these purchase contracts were drafted with clauses stating that they were not contingent upon the buyer qualifying for a mortgage, it could be argued, on the basis of the reasoning set forth in Hoosier Energy, that the deals were signed under both parties’ reasonable assumption that financing would actually be available from somewhere once construction was completed.  To quote the Southern District of Indiana in Hoosier Energy, “The crisis was not anticipated by the most senior economists in the country.”  If that is true, why should the defense of commercial impracticability, based on the lack of accessible credit, be any less available to the individual real estate buyer seeking to mitigate the effect of a pre-existing contract then it would be to an electrical generating plant operator dealing at arms length with a multibillion dollar insurer?  (To some degree, the question overlaps the analysis of whether “bailout” principles should apply equally to financial institutions and individual homeowners, both of whom are victims of their own inability to foresee the mortgage crisis).

The newly revised Fannie Mae guidelines, which went into effect on January 15, state that the government-controlled entity will no longer fund loans for new Florida condos if at least 70 percent of the total units in the development have not be conveyed or under a bona fide contract for purchase to either principal residence or second home purchasers.  Contract holders who require financing and are scheduled to close in coming months are basically out of luck.  It’ll be interesting to see how the courts handle this argument in 2009.

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28 Comments on "Can the Current Financial Crisis Be a Blessing in Disguise for Condo Contract Holders Scheduled to Close?"


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Anonymous
fairkim
7 years 7 months ago
Excellent points made, Lucas. However, I believe the practical impact of Hoosier will not necessarily give complete relief to the vast majority of folks who want to renege on their contracts with developers. The remedy that the developers are seeking — specific performance — is not in the realm of the possible unless the buyers have deep enough pockets to seal the deal in cash. Most of the buyers are merely attempting to salvage a portion of their deposit. Likewise, most developers are merely attempting to NOT refund the deposit — both parties realize that specific performance is impossible without… Read more »
Anonymous
H2O
7 years 7 months ago
The legalities of escaping an investment contract may be of greatest importance to the very liquid, sushi eating investor crowd but what about the little guy? I just read a Sun Sentinel article about the Deerfield Palms condo association. Only 28 of 168 units pay maintenance and they now have an outstanding $90,000 water bill. People in mortgage default are living in their units but refusing to pay their assessment too (why not, right?). These are not $700K units we are talking about but $150-200K units. The 28 people living there since the condo conversion have been paying their mortgages… Read more »
Anonymous
moretroops
7 years 7 months ago

Lucas, as someone who I respect, but who nonetheless helped so many hapless owners get into these ridiculous contracts, it comes as little surprise that you would align yourself with an attorney whose job it is to help folks get out of the same contracts.

And in that way it’s a perfect circle. You guys feed off each other, creating a cottage industry of fees until the ponzi scheme peters out.

Exhibit A: What’s Wrong With America.

Anonymous
AJ
7 years 7 months ago
george said “a bargain whatever price lol because I am IN tel aviv at the monent and nice apts on ocean are app 1000 US$ per sq ft and UP -no kidding”. That is why I laugh when some nincompoops on this blog predict 125 or 85/sf. Some of the typical ignorant and clueless guys who give a bad name to all the Americans! Who can fault when Europeans and the rest of the World laugh at us for our stupidity. I have just visited Lima, Bogota, Mexico City, Bombay and Kaulalumpur. Average yearly salry in all these places is… Read more »
Anonymous
jcrimes
7 years 7 months ago
Lucas Nice promotional tie-in for the business lawyers of Beck & Lee. In any event, Jared’s argument is baseless. In short, to apply the doctrine of impracticability, performance of the contract has to be so difficult/expensive with the reason causing such difficulty not being assumed by either of the contracting parties. The typical case comes up in the construction context, e.g., I agree to do X, and in the interim, some event occurs that simply, from an objective standpoint, won’t allow me or anyone else to do X. Here, as Jared conceded, all of these contracts explicitly state they are… Read more »
Anonymous
moretroops
7 years 7 months ago

Agreed, jcrimes, the improvised “get out of contract free” theories that plaintiffs’ lawyer have been concocting over the past few years are increasingly inane, illogical and — let’s be honest — desperate. Not that there aren’t some issues in a few of the contracts. But the idea that a contract is no longer binding because the economy shifted is a dangerous and deluded one. Ain’t gonna work.

Anonymous
Renter Tom
7 years 7 months ago
jcrimes is correct. A key point to the doctrine is that the cause of the impracticability (which differs from impossibility under contract law) can not be attributable to the acts of the party claiming such impracticability. With the contract specifically stating that the purchase is not conditional upon financing, then I don’t see how this doctrine applies…that is, the buyer can always be a cash buyer (as agreed upon, essentially) and that the buyers lack of cash can’t be used for impracticability purposes….next. – I too have had posts “not post”. I changed my email addressed used and then they… Read more »
Anonymous
Wild Bill
7 years 7 months ago

There is no economic crisis. Economies will flow from positive to negative environments. Some would even use the term “cycle” to describe what is taking place.

Anonymous
7 years 7 months ago

moretroops,

You assume incorrectly. Only 2 clients of mine got into preconstruction contracts. One of those was at Capital at Brickell which hasn’t even gotten off the ground yet.

jcrimes,

I don’t remember deleting any of your comments. What did you write about Icon? When a comment doesn’t post it goes to pending status where it stays until I approve it. Usually when there are too many links the spam filter picks it up and places it there.

Anonymous
jcrimes
7 years 7 months ago

i didn’t write anything offensive lucas…that’s why i was surprised. i think i asked why the icon link no longer appears on your list of condo buildings, or something to that effect.

Anonymous
7 years 7 months ago

jcrimes,

Your comment is still there. It’s #27 under the last post about Quantum. To answer your question, I still need to have my website developer re-add Icon Brickell to the list. He’s been on vacation since last week though and won’t be back until the 9th.

Anonymous
lara
7 years 7 months ago

http://www.propertyshark.com/mason/components/blogcenter/pdf_report.mas?id=44

Some interesting statistics for all of you to review

Anonymous
lara is wrong
7 years 7 months ago

Miami dade county clerk (the official source of Miami-Dade foreclosures) begs to differ Lara. That report is utter crap. I read an article about these different foreclosure stats providers having vested interests and highly inaccurate data.

Anonymous
lara is wrong
7 years 7 months ago

Also Lara, if you think foreclosures are dropping, you have another thing coming. We all know you have quite a few properties. I give it a year before you completely give up.

Anonymous
Un-Related
7 years 7 months ago

Off-point but jcrimes asked: “Is Related breathing down your neck now as well?”

You seeing those black Chevrolets parked across from your residence? “Big Brother” Gourge is watching YOU!!!

If they catch up with you, tell them you are AJ from Bombay…..

Anonymous
The Ace
7 years 7 months ago

Let them eat cake, served up by The Smart Money of course.

The Smart Money.

Anonymous
Muir
7 years 7 months ago

OT
I’m glad to see AJs back, I was worried.
:-)

Anonymous
jcrimes
7 years 7 months ago

lucas
you’re a better man than me…my tech savviness is utterly below par

Anonymous
lara
7 years 7 months ago

Why is LAra wrong? Lara did not create this report. Lara found it interesting and posted.
Why would I give up my properties? I mean anything can happen. This life is unpredictable but even if market goes to hell why would I give them up. Whoever wrote their comments did not even post his/her name. Try to be positive it will be easier for you to live. Do not envy, try to achieve something.

Anonymous
7 years 7 months ago

i belive that a better argument can me made agianst the devloper stating that because of the developers actions or inaction (bulk sales, undersatimating the maint fees, etc) the building does not qualify for financing making it imposible to close.

Anonymous
Doctor
7 years 7 months ago
AJ, Reeal estate is ultimately a local market, so comparing what’s happening in Tel Aviv to Mexico City, Bombay, Miami or wherever is a flawed argument… its not a like comparison. Yes, the world is becoming smaller, financing is global, etc, but hard assets have to be valued according to the location to which they’re attached. Money flows across a border because it has a market and is liquid but try picking up and moving a building…. not as easy. The reality of this local, hard-asset market is that there is housing oversupply, some places to the order of 9x… Read more »
Anonymous
Jeremy
7 years 7 months ago
AJ, You are very much mistaken in comparing Miami to a place like Tel Aviv, etc. I personally know Rio de Janeiro very well, and that is another place where relative to incomes, apartments cost much more than Miami per square foot but that is a function of a local market where it is almost impossible to build new construction, and I suspect some of the markets you describe are like that. So it really is supply and demand. In Rio, a dump on the beach can cost more per square foot than luxury waterfront in Miami, but that doesn’t… Read more »
Anonymous
Un-Related
7 years 7 months ago
Whoopee! Another litigation nightmare and it doesn’t involve the self-proclaimed “Donald Trump of the Tropics”!!! (You reading this AZ88??) To think, I actually looked at buying here (when it hits bottom). Oh, the horrors! Condo Meltdown Buyers say developer misled them into thinking condo was a Canyon Ranch resort January 29, 2009 By: Paola Iuspa-Abbott Reinaldo and Edith Gonzalez got their first taste of the Canyon Ranch Living brand while vacationing aboard the Queen Mary II. It was such a great experience, that shortly after returning from the cruise to Miami, the couple visited the site of a condo project… Read more »
Anonymous
Max
7 years 7 months ago

Lucas,

I find the Beck & Lee legal argument interesting. It may or may not hold water, but it’s thought provoking so i thank you for presenting it.

As an aside, i really enjoy this blog, and i appreciate your efforts to document the condo market and apply quantitative rigor to your analysis. I know you have strong opinions, but i never feel as if those opinions are tainted by an attempt to “make a buck” or bash competitors, which is refreshing.

Anonymous
Tim
7 years 4 months ago
The Mondrian on South Beach has a similar issues as with Canyon Ranch. Apparently, the developer did not disclose the management agreement. The management company,which I hear is really the developer, has the licensing trademark agreement with “Mondrian.” Neither the management agreement and the licensing agreement will the developer disclose to the buyers. This is troubling. The unit owners basically held hostage to the management company because if the condo assoc decided to fire the management company the name “Mondrian” would most definitely be gone. Also, the developer maintains tremendous control since the name Mondrian is what gives value to… Read more »
Anonymous
7 years 2 months ago

I HAVE TWO UNITS IN ICON BRICKELL VICEROY AND ONE UNIT IN TRUMP TOWERS III AND I WANT TO RECUPERATE ALL DEPOSITS . NO SCHEDULED CLOSING YET. PLEASE ADVISE. THANK YOU

Anonymous
liz
7 years 1 month ago
I’m not sure why Lucas selects Jared Beck. I am sure that he is a good attorney. But the fact that he’s a “Harvard” lawyer is more of a marketing ploy than its worth. I believe its very telling that someone whom must use is law school to promote himself maybe good not does not equate to results. I’m a real estate broker and went to Dartmouth College. That does not make me any better than other brokers, nor do I promote my education solely to “attrack” business. And these articles are interesting, from educational perspective. Once again, what about… Read more »
Anonymous
Kramer
7 years 1 month ago

I guess correct use of the English language and correct spelling is not an impediment to getting a degree from Dartmouth College!

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