The Virginia Court of Appeals issued an opinion last month with implications for buyers and sellers of real estate throughout the commonwealth. In a nutshell, the Court of Appeals said that a buyer may invoke an appraisal contingency to renegotiate the deal but, if a new price is reached, may not invoke the contingency again later. These contingencies are often included in real estate purchase contracts and allow a buyer to cancel the sale and get their earnest money deposit back, or renegotiate the price, if a home or property appraises for less than the agreed-upon purchase price.

The specific case involved a Department of Veterans Affairs (VA) loan for a residential property, but the court’s reasoning could be applied to any purchase contract with an appraisal contingency, depending on the language of the contract and the facts that occur.

Patrick Kennedy agreed to buy a Seaford, VA, property from Kevin Almond and Peninsula Realty LLC, using a VA loan. The agreed price was $845,000. Because the VA will not loan a buyer more than the property’s appraised "reasonable value," Section 11(A) of the purchase contract stated that the:

• "Buyer shall not…be obligated to complete the purchase of the Property…if the agreed purchase price or cost exceeds the reasonable value of the Property established by the [VA]. Buyer shall, however, have the privilege and option of proceeding with the consummation of this Agreement without regard to the amount of the reasonable value…"

The VA appraised the property at $750,000. The agreed-upon price, it turned out, was $95,000 more than the appraised value that the VA would provide. Rather than invoking Section 11(A) and walking away, Kennedy renegotiated with the sellers. The parties signed an addendum reducing the purchase price to $781,000, still $31,000 more than the appraised value.

The buyer then inspected the property and emailed his agent that "the home is in disrepair" and "I need you to help me get out of this." The agent notified the sellers that Kennedy was terminating the purchase agreement based on Section 11(A).

Litigation ensued, with the sellers claiming Kennedy’s failure to close amounted to a breach of contract, while Kennedy argued that he had retained the option to walk away since the renegotiated price was still more than the appraised value. The Circuit Court of York County ruled for the sellers and awarded them over $140,000 in damages, plus attorneys' fees.

The Court of Appeals of Virginia agreed with the Circuit Court. It held that Section 11(A) was unambiguous: The buyer had the "option and privilege of proceeding with the consummation" of the deal "without regard" to a lower appraisal. The Court of Appeals stated: "When the VA’s appraisal comes in below the purchase price, 11(A) allows the buyer to either proceed or walk away. It does not allow him to do both."

The case appears to be the first to analyze these issues in Virginia and possibly nationwide. Buyers will note that Kennedy could have avoided this result by ensuring he was satisfied with the deal in all respects before signing a renegotiated agreement. Sellers will take heart that a potential gambit for a buyer to sidestep his obligations was squelched. Either way, when a material contingency arises and the parties renegotiate with full knowledge of it, courts may closely examine whether the resulting agreement represents an election to proceed rather than allowing the contingency to remain a continuing exit right.

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