Financing reservation: no non-binding escape clause

Most buyers of real estate are dependent on a bank loan to finance the purchase price. Most purchase contracts therefore contain a so-called “financing reservation”. This cannot be invoked without further ado; certain conditions apply.

In a recent case before the Court of Appeal in ‘s-Hertogenbosch, things went wrong for a buyer who purchased an apartment for €900,000 with a financing reservation. He invoked that reservation, but was unable to show that he had made a genuine effort to secure financing and that he had properly substantiated his applications.

Although he submitted two rejection letters, the file showed, among other things, that:

• He had not provided all the necessary documents (such as valuation reports and income statements);
• A mortgage application had been changed by telephone without written confirmation;
• The second application had been submitted primarily to create a rejection, not to seriously obtain financing.

Consequence: the Court ruled that he had not made a valid appeal to the financing reservation. The buyer had to pay the full contractual penalty of 10% and additional compensation of €50,000.

What does this mean for you?

This ruling makes it clear that a financing clause is not intended as a simple cancellation button. A buyer must be able to demonstrate that he has made a genuine and full attempt to obtain financing. This means: serious applications, complete documentation and no “pro forma” rejection solely to meet the formal requirements.

For sellers, this ruling is an important confirmation that they may critically assess the financing reservation. When it is clear that a buyer is not fulfilling their obligation to make an effort and provide documentation, or is using the reservation for another purpose (such as selling their own home), the seller is not powerless and can have the financing reservation declared invalid.

How we help

We regularly advise on purchase agreements and financing reservations. We help with, among other things:

• Legally reviewing or drafting a purchase agreement and financing reservation;
• Assessing whether invoking the reservation is legally valid or can be challenged;
• Assisting parties in negotiations or when a dispute threatens to arise

The Court’s ruling shows how important it is to be clear at an early stage about what is expected of you and what risks are involved, both as a buyer and as a seller.