LEGAL CORNER: Court Decisions Regarding ‘Time of the Essence,’ ‘Reasonable Time,’ Retaining the Down Payment in Transactions

In connection with every real estate transaction in New York, real estate attorneys and real estate agents discuss with their clients, whether they are sellers or buyers, what the “closing date” will be and how it is to be determined, often utilizing terms such as “on or about closing date,” “reasonable time” and “time of the essence.” Most real estate contracts provide for an “on or about” closing date, which basically means an “estimated” closing date. The key takeaway is that an “on or about” closing date is not set in stone and is subject to reasonable extensions and adjournments depending on issues which may arise.

The ‘On or About’ Closing Date

In an attempt to explain to their clients what is meant by an “on or about” closing date, many agents and attorneys tell clients that this means the parties automatically have a 30-day extension beyond that date to close. Unfortunately, this is not the case. Others fail to explain to clients that an “on or about” date is just an estimated target and should not be relied on to make moving plans, schedule other closings, etc. Often, the parties do not end up closing “on or about” the date contained in the contract and it is imperative that both seller and buyer clients are made aware of this. Buyers and sellers should know that if any issues arise, the closing date could be pushed back by days, weeks or months.

The ‘Time of the Essence’ Closing Date

While most transactions and contracts in New York contain an “on or about” closing date, some contracts, although a rarer occurrence, provide for a “time of the essence” closing date. In this instance, a contract does set a specific date, and if either party fails to close by that date it would lead to a default. In the case of a buyer, it could mean the loss of the down payment. For sellers, it could lead to a lawsuit against the seller for specific performance (i.e., an action filed in seeking a judgment requiring the seller to close).

A more common way a “time of the essence” scenario could arise, is where a contract includes an “on or about” closing date and either party fails to close by the projected date. In this instance, the parties’ attorneys may declare “time of the essence,” provided certain legal requirements are met. Again, while many of these terms are commonly used, they are often not well understood. This article will review recent court decisions, as well as existing case law, and provide a general overview of what these terms and principles mean.

The Facts in Xelo v. Hamilton

In a recent Second Department, Appellate Division decision, the Appellate Court in Xelo v. Hamilton (see https://bit.ly/3HmCEPd) reversed the trial court’s decision and awarded the down payment to the seller holding that the purchasers were in breach of the contract and had not closed timely. In November 2006, the purchaser and seller entered into a contract for sale of residential real property for the purchase price of $854,900 and remitted a down payment of $15,000. The down payment was held by the seller’s attorney, acting as escrow agent under the contract, in his attorney escrow account. In the same month, the purchasers timely obtained a mortgage commitment in accordance with the contract of sale. The mortgage commitment was valid until Feb. 25, 2007. The contract provided for a closing that was “on or about 60 days” after the date the contract was executed. However, the seller was unable to vacate the home and no closing had been scheduled before the commitment expired. The court also pointed out that there was an existing violation relating to occupancy of the basement.

After the first commitment had expired, the purchaser then applied for a second smaller mortgage and sought a reduction of the purchase price from the seller, which the seller refused. The purchaser then applied for a third loan and was ultimately denied. The seller offered the purchaser the opportunity to cancel the contract provided the purchaser would agree to allow the seller to retain $3,000 to cover certain expenses incurred by the seller in connection with the transaction. The purchasers did not accept the seller’s offer and “…declared the seller to be in breach of the contract due to her failure to vacate the premises and remove the violation on the property and demanded the return of their down payment.” The seller’s counsel then sent the purchasers’ attorney a letter “…setting a ‘time of the essence’ closing.”

The purchasers’ attorney, in turn, sent correspondence to the seller’s attorney stating that the purchaser “…would not close and again demanded the return of their down payment.” The seller’s attorney would not release the down payment held in escrow and the purchasers sued for the return of their down payment along with other expenses. The seller counterclaimed against the purchasers claiming that the seller was entitled to retain the down payment because the purchasers failed to attend the closing date set in the seller’s “time of the essence” default notice. The Supreme Court (i.e., the trial court) had originally decided in favor of the purchasers and awarded them $17,300 plus interest. The seller appealed and the appellate court overturned the trial court’s decision. The appellate court held that the “…purchasers never placed the seller in default,” and as a result, the purchasers’ failure to close by the date set forth in the seller’s “time of the essence” notice caused the purchasers to be in default and to forfeit the down payment.

A ‘Reasonable Time’ to Cure

The Xelo decision outlines the legal parameters that must be adhered to when a party is attempting to declare the opposing party in default and to set a “time of the essence” closing date. The court explains that “Unless a contract for the sale of real property makes time of the essence, ‘the law will allow the vendor and vendee a reasonable time to perform their respective obligations, regardless of whether they specify a particular date for the closing of title.’” Therefore, if a contract does not explicitly contain a “time of the essence” provision and closing date, the parties are legally entitled to a reasonable time to close and must be provided a reasonable opportunity to cure a defect. If the buyer is not able to perform within such reasonable time, the buyer would forfeit the down payment. Alternatively, if a seller is unable to perform, the buyer can then commence a lawsuit seeking specific performance and a judgment requiring the seller to close.

In another Second Department Appellate Division case, Ashkenazi v. Miller (see https://bit.ly/3HberLt), the court explains that “What constitutes a reasonable time [for performance] depends on the facts and circumstances of the particular case.” The court further explained that “Included within a court’s determination of reasonableness are the nature and object of the contract, the previous conduct of the parties, the presence or absence of good faith, the experience of the parties and the possibility of prejudice or hardship to either one, as well as the specific number of days provided for performance.” The Ashkenazi decision makes clear that “reasonableness” must be determined on a “on a case-by-case basis.”

Notice of Default and Declaration of ‘Time of the Essence’

The court in Xelo explained, in the case of a buyer, that while a buyer normally would be entitled to receive a refund of the down payment where a seller defaults and is unable to cure the default, the buyer is first required to make a demand of the seller to cure the default. The court held that “…it was incumbent upon the purchasers to put the seller in default by tendering performance, demanding that the seller perform her obligations, and giving her a reasonable opportunity to cure the defects.” Therefore, unless the parties are provided with a reasonable time to cure the default, a declaration of default and “time of the essence” notice would not be valid.

Ashkenazi provides that in order for a party to declare time of the essence, “…there must be a clear, distinct, and unequivocal notice to that effect giving the other party a reasonable time in which to act.” It is commonplace for attorneys to provide a 30-day time period as a “reasonable” time for the other party to cure a default—however, that may not always be the case. If the default requires more than 30 days to cure, then the “reasonable” time period could be greater and that must be considered.

In Xelo, the “…rider to the contract of sale specifically provided that violations to be removed by the seller would not constitute objections to title, provided that the seller, at closing, deposited a sum sufficient to remedy the violations within 90 days from the date of closing.” Therefore, the purchasers, according to the contract, did not have a right to cancel or not attend the closing because of the violation, but instead were still required to close because, according to the contract, the seller had 90 days after the closing to clear the violation. Purchasers’ failure or refusal to attend the closing on the time of the essence date, was seen by the court as an anticipatory breach and resulted in the purchasers forfeiting their down payment.

The ‘Ready, Willing and Able’ Standard

Most real estate agents are familiar with the “ready, willing and able” concept when it comes to establishing whether a commission has been earned in a real estate transaction. The same concept is also utilized when determining whether a seller or purchaser would be entitled to specific remedies in connection with a breach. Once a party delivers a default notice and “time of the essence” letter, that party must also be ready, willing and able to attend the closing and complete the transaction.

In Martocci v. Schneider (see https://bit.ly/3olhIiv), the court held that in order “To prevail on a cause of action for the return of a down payment on a contract for the sale of real property, the plaintiff must establish that the defendant breached or repudiated the contract and that the plaintiff was ready, willing, and able to perform on the closing date.” Similarly, if a seller is sending a “time of essence” letter establishing a “time of the essence” closing date, also known as the “law date,” the seller must be ready, willing and able to close in accordance with the contract of sale, with all title issues cleared, and tender the deed to purchaser.

In most instances, the seller or purchaser must schedule and attend an actual closing. The court in Martocci explained that “…where a seller seeks to hold a purchaser in breach of contract, the seller must establish that [he or she] was ready, willing, and able to perform on the time-of-the-essence closing date, and that the purchaser failed to demonstrate a lawful excuse for its failure to close.”

The Importance of Understanding The Concept of ‘Time of the Essence’

It is important for attorneys and real estate agents to understand the concepts of “time of the essence” and “reasonable time” to cure because clients need to understand the risks and issues that may arise during the course of a transaction. For purchasers, it is important that they understand that if they breach the contract, they could potentially forfeit their entire down payment. It is also important, depending on whether the client is a buyer or seller, to be able to negotiate the amount of the down payment. A lower down payment would put less of the buyer’s funds at risk. As for the seller, the higher the down payment, the less likely the buyer will default or walk away from a transaction.

Real estate agents and attorneys should assist the parties in making sure any issues are addressed in advance so that the parties are not placed in position where they could be held in default. One important goal is to manage the expectations of the parties especially in New York transactions, where the time to close is usually 60 days-90 days. It is important to inform both buyers and sellers that unexpected issues come up all the time and that the closing date in the contract is not a date that is set in stone, in fact, the “on or about” closing date is rarely the actual closing date.