Failure to Get Financing Was Not Grounds For Refund of Earnest Money

Franklin Land Associates, LLC v. Sethi, 281 So.3d 119 (Miss. Ct. App. 2019). In 2010, buyer and seller entered into a real estate purchase agreement for land in Madison, Mississippi. The agreement required the buyer to deposit earnest money with the seller’s attorney as escrow agent. The agreement provided that the earnest money was non-refundable, except that the buyer would be entitled to a return of the escrow funds if buyer terminated the agreement because “Buyer has not received all necessary on-site and off-site governmental approvals reasonably deemed necessary by Buyer for Buyer’s intended development of the Property, as determined in Buyer’s sole discretion.” The project was a shopping center. Buyer subsequently terminated the agreement, as permitted by the agreement, and claimed that it was entitled to a return of the earnest money because it did not receive the necessary governmental approvals. The escrow agent filed an interpleader complaint in the Chancery Court of Leflore County requesting a ruling about who was entitled to the earnest money. The evidence showed that buyer withdrew its application for the governmental approvals because of problems obtaining tax increment financing (“TIF”). City officials testified that the city would have approved all of the permits needed for the project, and that the buyer withdrew its application only because the negotiations regarding the TIF were not successful. The chancery court found that buyer had not shown that the termination was due to its failure to receive the necessary governmental approvals, but rather that the buyer terminated the agreement because of its failure obtain the TIF. The Mississippi Court of Appeals, in an opinion by Justice Barnes, affirmed the chancery court’s holding, finding that the trial testimony presented substantial evidence that buyer prevented the attainment of the governmental approvals by withdrawing its applications for permits because of the inability to obtain the TIF. The Court of Appeals explained that under the “doctrine of prevention,” a contractual party who causes the failure of performance cannot take advantage of that failure.

Note 1: This case reminds contracting parties that they cannot manufacture a failure of pre-conditions to avoid performance. The contract terms will control which pre-conditions must be met to require performance. However, the courts may consider evidence on why pre-conditions are not met when deciding whether a party is excused from performance.

Note 2: This case also provides a hard lesson about drafting agreements to purchase. The seller probably considered obtaining approval for TIF as a necessary governmental approval to complete its project, but the agreement only allowed the buyer to a refund of the earnest money if the buyer did not receive on-site and off-site approvals necessary for development of the property. The opinion does not include any discussion of whether approval of TIF was a necessary governmental approval. If the seller had specified in the agreement that approval of TIF was a necessary governmental approval, the seller should have been entitled to a refund of the earnest money.

Note 3: According to the opinion, the Mayor of Madison “conditioned the financing on her ‘full and unconditional and absolute ability to approve or deny any and all tenants in the planned shopping center.’”

To learn more about the co-authors, Rod Clement and Lindy Brown, visit Rod’s member profile or firm profile or Lindy’s firm profile.