Suspensive condition of loan: a missed deadline causes the sale to fail

Imagine: you are in Chinon, you have signed a preliminary contract to buy the house of your dreams, rue du Commerce. The seller agrees, you pay a deposit of €20,000. The preliminary contract provides that you must obtain a loan before 1 August. Your bank sends you the offer on 2 August. The seller tells you: 'Too bad, you are the owner, sign the deed.' Who is right? This question is asked by thousands of buyers and sellers every year.

The answer is in a judgment of the Court of Cassation of 11 May 2011 (n° 10-14.536). The judges ruled: if the loan offer arrives after the deadline set in the preliminary contract, the suspensive condition (i.e. the condition that suspends the sale pending the loan) is not fulfilled. The seller cannot force the buyer to sign. A decision that seems logical, but has concrete implications.

So, what to do if your bank is dragging its feet? And if the seller claims damages? This article analyses the judgment and gives you the keys to avoid pitfalls. From Loches to Tours, these rules apply everywhere.

The facts: a story that happens every day

In 2004, a couple, Mr and Mrs X, signed a preliminary contract (synallagmatic promise) with a seller to buy a house in Loches. The price: €150,000. The preliminary contract includes a suspensive condition of loan: the buyers must obtain financing before 1 August 2005. An addendum (an amending document) postpones this date to 16 November 2004, but the deadline for fulfilling the condition remains set at three months after the signing of the addendum.

Mr and Mrs X apply to their bank. The loan offer is sent to them… on 17 November 2004, i.e. one day after the expiry of the three-month period provided for by the addendum. The seller, considering that the condition had been fulfilled (since the loan had been granted, even one day late), asks them to sign the notarial deed. The couple refuses. The seller sues them to have them declared owners and to obtain damages.

The Court of Appeal rules in favour of the seller: according to it, the loan offer had indeed been issued within the deadline, and the mere fact that it reached the buyers after the deadline was not enough to deprive the condition of its effect. Mr and Mrs X appeal to the Court of Cassation.

The reasoning of the court — explained

The Court of Cassation quashes the appeal judgment. It relies on Article 1176 of the Civil Code (in its version applicable at the time, now Articles 1304-4 et seq.). This article provides that when an obligation is contracted under a suspensive condition (a condition that must be fulfilled for the obligation to take effect), the debtor (here the buyer) must perform his obligation if the condition is fulfilled within the agreed period. And if the condition is not fulfilled within the period, the obligation lapses (it disappears).

In plain English: if the loan offer does not arrive before the deadline, the condition is not fulfilled, and the sale cannot be imposed. The Court of Appeal had nevertheless considered that the mere fact that the bank had made its decision before the deadline was sufficient. But the Court of Cassation is strict: the condition is deemed not fulfilled if the event (the obtaining of the loan, materialised by receipt of the offer) did not occur within the deadline. It does not matter that the loan was granted internally.

This is a protective decision for the buyer: he cannot be compelled to buy if he has not received the loan offer in time. But it also puts pressure on banks and on the buyer himself, who must ensure that everything is done on time.

The Court does not create new law: it applies the letter of Article 1176. But it reminds that lower courts cannot interpret the suspensive condition too loosely. This decision is a confirmation of previous case law, notably a judgment of 28 November 2007 (n° 06-18.065) which went in the same direction.

What this changes for you — in practice

For the buyer: if you are a buyer and the loan offer arrives after the deadline, you are not obliged to buy. You can recover your deposit (unless there is an abusive penalty clause, but that is rare). Example: in Tours, a buyer had signed a preliminary contract with a suspensive condition set for 15 March. The loan offer arrives on 16 March. The seller demands signature. Thanks to this case law, the buyer can refuse and recover his €15,000 deposit.

For the seller: you cannot force the buyer to sign if the condition is not fulfilled within the deadline. But you can claim damages if the buyer did not take the necessary steps (e.g. he filed his loan application late). Warning: it is up to the seller to prove that the buyer did not do what was necessary.

For the notary or estate agent: you must check the dates and advise the parties to set a realistic deadline. A deadline that is too short risks failure of the condition. In Loches, a preliminary contract provided for 30 days to obtain a loan; it was too tight, the bank took 45 days, the sale fell through.

For the banker: send the loan offer as early as possible. One day late can scupper the sale and engage your liability. The banker may be ordered to compensate the buyer and seller.

Four tips to avoid this type of dispute

• Negotiate a realistic deadline in the preliminary contract: do not allow yourself to be imposed a deadline that is too short (less than 45 days). Banks take on average 30 to 60 days to grant a loan. Insist on a sufficient deadline, especially if you are in Chinon where local banks may be slower.
• Make your loan applications as soon as the preliminary contract is signed: do not wait. Every day counts. If you have any doubts, ask for an agreement in principle before the preliminary contract.
• Follow up on your file: chase your bank in writing (email with read receipt). If the deadline approaches and you have no offer, ask the seller for a written extension of the deadline (addendum).
• Keep all evidence: date of receipt of the offer, letters, emails. In case of dispute, it is up to you to prove the date of receipt. Preferably use registered letter or email with read receipt.

Further information: related case law and developments

The Court of Cassation has maintained this line in subsequent judgments. For example, in a judgment of 20 December 2012 (n° 11-25.206), it held that the suspensive condition is only fulfilled if the buyer has obtained a loan conforming to the characteristics provided for in the preliminary contract (amount, duration, interest rate). If the offer is different (e.g. higher rate), the condition is not fulfilled.

On the other hand, if the buyer receives the offer after the deadline but accepts it and signs the notarial deed, he implicitly waives the right to rely on the lapse. Caution is therefore required.

The trend is towards protection of the buyer, but with a limit: the buyer must have taken the necessary steps. If he does not submit any loan application, the condition is deemed to have failed through his fault, and the seller may obtain damages.

In practice: what to do

FAQ:

• The loan offer arrives 2 days after the deadline, what should I do? You are not obliged to buy. If you still want to buy, you can ask the seller for an addendum to extend the deadline. Otherwise, the preliminary contract lapses and you recover your deposit (unless there is a contrary clause).
• The seller claims damages from me, is that possible? Yes, if he proves that you did not take the necessary steps (e.g. you filed your application late). In that case, you may be ordered to pay compensation (often 5 to 10% of the price).
• Can I waive the suspensive condition after the deadline? Yes, if you still want to buy. You then sign a written waiver. But be careful: you will then have to buy without being sure of having the loan.
• Can the notary be liable? Yes, if he did not draw your attention to the dates or if the preliminary contract is poorly drafted. His professional liability may be engaged.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →