Yesterday, I wrote a blog about the four reasons why lender restrictions in short sale addenda are unenforceable. To recap, they are:
The Four Components
1. The restrictions are required without legal “consideration” and are therefore invalid;
2. The restrictions are voidable because there is no “privity” of contract;
3. The restrictions cloud title (some states formally prohibit the restrictions);
4. The restrictions violate the spirit and intention of Uniform Commercial Code.
Today, I am writing about the second component. The restrictions are unenforceable or voidable because there is no “privity” of contract between the lender and the buyer. This is a very old legal contract law issue and it is rarely asserted because it is so basic that it rarely is an issue. In most situations, that is! Real estate of course is different.
The premise is that you cannot contractually enforce a right, obligation, or duty upon someone unless you have a direct, contractual relationship with that person. In the case of restrictions placed in addenda or affidavits, there is no contractual relationship between the short selling lender and the buyer. There IS a contractual relationship with respect to the short selling home owner and restrictions on them MAY be valid (or I would say less INvalid). However, there are still solid arguments that the restrictions against the seller are invalid or unenforceable as well.
The premise here is simple and a long-standing principle of contract law. If A owes B $1,000 and B owes C $1,000, a simple solution would be to have A pay C. Let’s suppose that A and B agree to that and that A never pays the $1,000. C cannot enforce the deal against A because he has not “privity” of contract with A. His relationship is with B only.
You can take this argument a step further because if the buyer is an investor that intends to sell the property, there is even a stronger argument against enforceability of restrictions because now there is another party that has no relationship to the short selling lender and they are one step further removed from the transaction.
Link to prior article: http://activerain.com/blogs/deigs1
Paddy Deighan Esq.