Typically, residential real estate contracts contain an “on or about” closing date. This is not a firm date, strictly enforceable against either party, but rather, a best estimate and the goal of the parties, at the time that the contract was entered into. Clearly, issues such as title exceptions, mortgage and finance contingencies, as well as the availability of the parties, their counsel, bank attorneys, title closers, etc., all lend uncertainty to trying to predict a precise closing date at the time of contract. Thus, a reasonably estimated date is picked (usually 60-90 days out from the contract signing), with both parties knowing it is subject to change, etc. Neither party can sue, or default, the other, for not being able to close on the “on or about” date.
While customarily a mutually agreeable closing date is eventually scheduled, if one party is resistant, or fails to confirm a closing date, the other party has two options: first, demand a contract rider or amendment, where both parties agree on a firm date, in writing. This language would say that “time is of the essence” as to the new closing date; this makes the closing date (referred to as “law day”) and it becomes a strict date that must be complied with, and is no longer a flexible “on or about date”. If either party fails to close title on such day, they are in default of the contract.
The second option is what is commonly referred to as a “Time of the Essence” Letter (TOE Letter). This is a unilateral designation by one party, of what the closing date will be. Because both parties are not agreeing to this date, and the date is being chosen solely by one party, the Courts have, through common law and case-law precedent, put a number of conditions on TOE Letter closings.
First, the TOE Letter must give reasonable advance notice of the closing date. Clearly, sending a letter today, which demanded that the party close tomorrow, would not be reasonable. While there is no hard and fast rule as to what is “reasonable” (case-law dictates that will be deemed “reasonable” shall be determined on a case by case basis, depending upon the facts and details of the transaction, the past conduct of the parties, etc.), thirty-days’ notice is generally used. The period can be lengthened, or shortened, as circumstances require, but the Court would look to each individual transaction to see if the advance notice period given in the letter was objectively reasonable.
Second, the TOE Letter must expressly advise the party who receives it of what the consequence will be for failing to close on the chosen date. If it is a buyer receiving it, for example, the letter should state that they will lose their deposit, and that the seller shall retain the deposit as liquidated damages, and that they will also lose the opportunity to purchase the property. If it is a seller receiving the letter, for example, the letter would typically say that the buyer can sue to reclaim their deposit (and/or additional damages), or for “specific performance” of the contract.
Third, the TOE Letter must be given in good faith. The party receiving the letter must have no valid defenses to failing to close, and the sender should not send one if there is an issue that they know the receiving party cannot fix, merely to apply leverage, and cause a technical default. (For example, if you were aware the other party needed a week to be able to close, and you were to send a TOE Letter demanding a closing in six days). In another example, a seller who has an illegal condition/ alteration at the property, cannot force the purchaser to close, merely by serving a TOE letter, and attempting to leverage them to close, by attempting to put them in a position of having committed a pre-emptive default; in that case, the purchaser may or would have a legitimate defense, or reason not to close, under the contract, and the TOE Letter would ultimately be ruled to have no effect. There is case-law that generally provides that reasonable adjournments or good faith attempts at rescheduling an “on or about” closing date should occur before resorting to a TOE letter.
Fourth, on the chosen date, the party sending the TOE letter must be ready, willing and able to perform their part of the transaction also. The TOE designation becomes a double edged sword that can cut against either party. So the sending party must be assured they will be able to perform their obligations to close on the set date, lest the other party appear to close, and the party who sent the letter is not, and be held in default themselves. While not often used, contract riders, as opposed to TOE Letters, can make “Time of the Essence” as to one party only. This alleviates the obligation of one party to be “ready, willing and able” on a date certain, where failure to be so could cut against them. They will ultimately have to be “ready, willing and able” in order to default the other party, but, they alone have the power to adjourn if they are not, while the other party would be held to the date. Naturally, since this only protects one party, it is not too often agreed upon by both sides.
On the closing day, the party who sent the TOE Letter should have everything in place to close title, even if they are reasonably certain the other party may not appear. For a purchaser, this may mean having their lender/ lenders counsel present, or at least on stand-by, ready to appear if the other party does appear, ready to close. A title closer should also be present, and the funds to consummate the transaction also available and ready to disburse. For the seller, keys should be available to deliver, and a Deed prepared, ready to be executed, along with any other transfer tax documentation, or other necessary documents. Many attorneys will arrange to have a stenographer/court report appear at the TOE closing, to memorialize the identity of the participants, to show that all necessary parties are there (other than any defaulting parties who do not appear), and that everything necessary for the closing to occur is ready; sometimes even marking documents “for identification” by the court reporter, to accompany the transcript. This is not strictly required, however, it is useful if the matter results in litigation, as good evidence of the parties default in appearing, and that everything else was ready in order for the closing to occur.
If you have any questions about “Time of the Essence” closings, or if you have clients who find themselves in a pre-litigation scenario, and need assistance, please, do not hesitate to contact our offices. We are here to help!
Jeremy Panzella, Esq.