Does Seller Have Loan Approval Rights Under Seller Financing Addendum?

QUESTION: One of my listings is under contract using the Offer to Purchase and Contract (form 2-T). The seller is providing seller financing so we attached the Seller Financing Addendum (form 2A5-T) to the Contract. We’re in the Due Diligence Period. Does the seller have a right to approve or disapprove the loan like a bank, or is the seller obligated to make the loan described in the Seller Financing Addendum without any further investigation or verification of the creditworthiness of the buyer? The reason I ask is because after the contract was signed the seller obtained information that the buyer may not have sufficient income to make the loan payments and hopes to pay off the loan through the sale of current assets. The seller is still willing to make the loan but wants a larger down payment. If the buyer won’t agree to a larger down payment, can the seller refuse to make the loan? The way I see it, the buyer can either accept the seller financing with a larger down payment or exercise the buyer’s right to terminate the Contract during the Due Diligence Period.

ANSWER: In our opinion, the Seller Financing Addendum obligates the seller to provide the financing described in paragraph 1(d) of the Contract on the terms contained in the Addendum. See the lead-in sentence immediately preceding paragraph 1 of the Addendum. There is nothing in the Addendum or the Contract that makes the seller’s obligation to provide the financing contingent on the seller being satisfied with the buyer’s financial condition. The seller does not have the right to force the buyer into either accepting new loan terms or terminating the Contract during the Due Diligence Period and the seller’s refusal to provide the financing on the terms set forth in the Addendum could be characterized as a breach of contract by the seller.

A seller should do his or her own “due diligence” on whether or not to provide seller financing before executing a Contract that includes the Seller Financing Addendum. Of course, if a seller agreed to provide seller financing based upon misleading information provided by the buyer, it’s possible that the seller could be excused from the obligation to provide the financing.

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