A Louisiana purchase agreement includes a financing contingency. The buyer, David, applies for a mortgage but is denied. Under Louisiana contract law, what is the legal effect on the purchase agreement if the financing contingency is properly invoked?
Correct Answer
D) The contract is dissolved and the buyer is entitled to a return of the earnest money
Under Louisiana Civil Code principles governing conditional obligations (Arts. 1767–1776), when a suspensive condition (such as a financing contingency) fails through no fault of the obligor, the obligation is dissolved. If the buyer properly invokes a financing contingency because the loan was denied, the purchase agreement is dissolved and the earnest money must be returned to the buyer. The contingency protects the buyer from forfeiting the deposit when the specified condition cannot be met.
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Related Topics & Key Terms
Key Terms:
Related Concepts
An option contract gives one party the exclusive right, but not the obligation, to purchase or lease a property at a specified price within a specified time period. The buyer pays option consideration to keep the option open.
A purchase agreement is a legally binding contract between a buyer and seller that outlines the terms and conditions for the sale of real property. It is also commonly called a sales contract, purchase and sale agreement, or earnest money agreement.
Specific performance is a court-ordered remedy that compels the breaching party to fulfill their obligations under the contract rather than simply paying monetary damages. It is an equitable remedy used when monetary damages would be inadequate.
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