## Facts

- John Kuhn and Marlene Kuhn agreed to buy a newly constructed home in New Jersey from Spatial Design, Inc. for \$515,000 and paid a \$50,000 deposit.
- The contract contained a mortgage-contingency clause making the purchase conditional on the Kuhns obtaining mortgage financing.
- The Kuhns sought financing through Sterling National Mortgage Company, Inc. and its employees, Stanley Ellberger and William Wolf, who submitted a loan application to Prudential Home Mortgage Company.
- Prudential initially issued a mortgage commitment, but later withdrew it.
- The Kuhns then attempted to cancel the contract based on the failed mortgage contingency and demanded the return of their \$50,000 deposit.
- Spatial refused to return the deposit and later resold the house to other purchasers for \$434,000 in a declining market.
- The Kuhns sued for return of the deposit; Spatial counterclaimed for breach of contract, asserting the Kuhns intentionally misrepresented their finances in the mortgage application.
- After a bench trial, the Law Division found that the Kuhns, aided by Sterling personnel, purposely submitted a mortgage application that materially misstated their income, assets, and financial circumstances to obtain a loan they could not have qualified for if they had been truthful.
- The trial court held the Kuhns in breach, denied their request for the deposit’s return, and awarded Spatial damages (with credit for the retained deposit), including losses tied to the resale and resale-related expenses.
- The Kuhns appealed, challenging the breach finding and the damage award.

## Issues

1. Whether purchasers may rely on a mortgage-contingency clause to cancel a real estate contract and recover their deposit when the failure of financing resulted from the purchasers’ own intentional misrepresentations in the mortgage application process.
2. What measure of damages applies to a seller’s loss from the buyers’ breach when the seller resells the property in a declining market, including whether resale-related expenses such as a broker’s commission may be recovered.

## Decision

- The Appellate Division affirmed the judgment for Spatial Design, substantially for the reasons stated by the trial judge.
- The court agreed that the mortgage contingency did not excuse performance because the Kuhns’ wrongful conduct caused the financing to fail.
- The court upheld the damage award, approving the use of the reasonable resale price obtained in good faith within a reasonable time in a falling market.
- The court approved recovery of resale-related expenses attributable to the breach, including a real estate commission and related indemnification exposure arising from the resale.

## Legal Principles

- A party cannot rely on the failure of a contractual condition precedent when that party’s own wrongful conduct caused or materially contributed to the condition’s failure (prevention doctrine).
- A mortgage-contingency clause protects a buyer who seeks financing honestly and in good faith; it does not protect a buyer whose intentional misstatements distort the lending process and trigger the loss of financing.
- When a buyer breaches a real estate contract and the seller later resells in a declining market, damages may be proven using the difference between the contract price and a resale price that is reasonable, obtained in good faith, and achieved within a reasonable time.
- Consequential resale expenses reasonably incurred because of the buyer’s breach—such as brokerage commissions—may be recoverable as part of the seller’s damages.

## Conclusion

The Appellate Division held that the Kuhns could not use the mortgage-contingency clause to avoid the contract and reclaim their deposit because their own intentional misrepresentations in the mortgage application process caused the financing failure. It affirmed the trial court’s award of damages to Spatial, measured by the seller’s loss as shown by a reasonable resale in a declining market and including resale-related transaction costs such as commissions.


Kuhn v. Spatial Design, Inc., 585 A.2d 967 (1991)