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A financing clause is only effective if you invoke it precisely according to the agreed formalities — often a written notification to both the seller and the notary, with proof of rejections. If you fail to do so, the sale stands as is, and you could be liable for a substantial contractual penalty. A buyer who handled this incorrectly had to pay €630,000, and the judge did not reduce that penalty.
This case (Amsterdam District Court, ECLI:NL:RBAMS:2020:3970) shows how important it is to understand the scope of contractual provisions, especially in major transactions such as the purchase of commercial property or shares.
From financing contingency to penalty
A buyer purchased two properties for 6.3 million euros. In such a purchase agreement, a financing clause is common: a resolutive condition that allows the buyer to withdraw from the purchase if they cannot obtain a mortgage. This protects both the buyer (no obligation to purchase without financing) and the seller (no transaction with a buyer who cannot pay). Sometimes a contractual penalty is attached to it.
In addition to the financing clause, it was agreed here that the buyer had to provide a deposit or bank guarantee, under penalty of a fine of 10% of the purchase price — or 630,000 euros.
The reservation was not invoked correctly
The buyer was unable to obtain financing and his advisor invoked the reservation. However, the agreement stipulated formalities: a written notification to both the seller and the notary, plus two written rejections of financing applications. These formalities were not complied with. The seller wrongly assumed that the reservation had been validly invoked and did not request a bank guarantee or deposit — whereas the sale therefore proceeded as planned and that obligation remained in effect. The seller claimed the penalty of 630,000 euros.
No reduction of the fine
The judge ruled that the reservation had not been validly invoked and that the buyer was in default. The buyer requested a reduction of the penalty. A judge may reduce a contractual penalty if equity clearly requires it, in accordance with the standard set out in the Intrahof/Bart Smit judgment (ECLI:NL:HR:2007:AZ6638): only if the clause leads to an excessive and unacceptable result. Those circumstances did not exist — moreover, the seller suffered damage because the properties were still for sale. The buyer had to pay the full 630,000 euros.
Frequently Asked Questions
How do I correctly invoke a financing clause?
Follow the formalities of the agreement exactly, often involving timely written notification to both the seller and the notary, with proof of (usually two) rejections of financing applications. Do not deviate from this.
Can a contractual penalty be reduced?
Only if equity clearly demands it and the clause leads to an excessive, unacceptable result. The judge exercises restraint in this regard.
What if the seller assumes that the reservation is valid?
That does not help the buyer. If the reservation has not been invoked correctly, the purchase remains valid and obligations such as a deposit or bank guarantee remain in effect.
Have contractual provisions reviewed
An incorrectly invoked reservation can cost you hundreds of thousands of euros. The legal experts at MKB Juristen advise you on the legal implications of your agreements, especially involving large sums. View our expertise in real estate law or contact us.
