## Facts

- Sellers owned approximately 1,567 acres of farmland in Arkansas.
- Buyers and sellers executed a written sale contract (March 13, 1980) for $2,010,675, with International Farm Management, Inc. (IFM) acting as agent and holding earnest money.
- The contract made the sale contingent on buyers obtaining a Federal Land Bank loan for 75% of the purchase price.
- Buyers deposited $100,000 in earnest money with IFM; the contract provided that upon purchaser default the earnest money would be divided equally between IFM and the sellers.
- Because the property lay in two Arkansas counties, buyers pursued loan applications through two Federal Land Bank offices.
- Financing was approved, but in a total amount below the 75% specified in the contract (approximately 73.98% of the purchase price).
- Buyers refused to close and sued to recover the earnest money, asserting the financing condition precedent was not met despite their reasonable diligence and good faith.
- After a bench trial, the trial court dismissed the buyers’ claim and allowed defendants to retain the earnest money under the contract.

## Issues

1. Whether a loan approval for approximately 73.98% of the purchase price substantially performed the contract’s 75% financing condition precedent.
2. Whether the buyers exercised reasonable diligence and good faith in attempting to obtain the specified 75% financing so as to avoid forfeiture and recover the earnest money.

## Decision

- The appellate court held the trial court erred in treating the 73.98% loan approval as substantial performance of a precise 75% financing condition precedent.
- The appellate court nevertheless affirmed the judgment for defendants because the evidence supported the trial court’s finding that buyers did not act with reasonable diligence or good faith in pursuing the specified financing.
- Because buyers failed in their obligation to make a good-faith, diligent effort to satisfy the contingency, they were not entitled to recover the $100,000 earnest money.

## Legal Principles

- A financing-contingency clause requiring a loan for a stated percentage of the purchase price is a condition precedent; courts generally enforce such a specific condition as written rather than relaxing it through substantial performance.
- A party protected by a condition precedent must use reasonable diligence and act in good faith to bring about the condition; a party may not rely on the condition’s failure when the party’s own lack of good-faith effort contributed to nonoccurrence.
- When a purchaser’s failure to perform is treated as a default under a contract’s terms due to inadequate good-faith efforts, an earnest-money forfeiture clause may be enforced according to its allocation provisions.

## Conclusion

The court affirmed dismissal of the buyers’ claim for return of the earnest money, holding that although a loan below 75% did not satisfy the financing condition precedent, the buyers’ lack of reasonable diligence and good faith barred them from invoking the condition’s failure to avoid default and recover the deposit.


Covington v. Robinson, 723 S.W.2d 643 (Tenn. Ct. App. 1986)