It's The Law - Beware! Closing Deadlines Cut Both Ways

Not a year goes by without a seller or purchaser insisting to me that time be made of the essence in a real estate transaction. This often stems from lack of trust in timely performance by the other party or just a simple desire to get the deal done by a certain date. Either way, the request always sets bells off for two significant reasons: Time of the essence can cut both ways and must be invoked properly to be enforceable.

Time of the essence is the proverbial gun to the head when it comes to performing under a contract. When time is of the essence, reasonable excuses by the breaching party carry little or no weight. Generally, lack of performance by the specified date will result in breach of contract and entitle the other party to terminate the contract and pursue its remedies.

When a contract specifies a closing date and provides that time is of the essence, the requirement applies to both seller and purchaser. Alternatively, the requirement can be imposed on one of the parties and not the other. In the absence of a time-of-the-essence mandate, either party may adjourn the scheduled closing date for a reasonable period without triggering a contract breach. Before foregoing such flexibility, it is prudent to examine how time of the essence can come back to haunt you.

The closing process can be very fluid and the closing itself is often a moving target. For both sellers and purchasers, consummating a typical transaction usually involves a myriad of variables–many of which are outside of the parties’ control. Even relatively simple sales and purchases are not immune.

Sellers usually have one or more consents to obtain prior to closing. If the property or seller is subject to a court proceeding, judicial approval may be necessary. Payoff letters and lien satisfactions require cooperation from third parties not controlled by principals. Clearing title issues may involve lead time and, in many jurisdictions, the process to remove violations of record is cumbersome. On the buy side, equity and debt sources need to fall into place. Preparing to close acquisition financing can be more complicated than the underlying purchase itself. Orchestrating principals and counsel from the equity investor, debt provider and mezzanine lender camps is no small task.

Once the choice is made to provide in a contract that time is of the essence, or to invoke time of the essence prior to closing, it is critical that the applicable clause or notice be crafted properly. Courts in New York and other jurisdictions generally require clear, distinct and unequivocal language evidencing intent that time is to be of the essence.

Clauses that provide for a closing “on or about” or “on or before” a certain date are generally inadequate to evidence the requisite intent. A New York court found to be ambiguous a notice imposing time of the essence that also asked for cooperation in meeting the time requirement. In another case involving a seemingly clearly-worded notice, the absence of a warning of the consequences of failure to perform timely was cited in the decision that the party’s notice fell short of making time of the essence.

In addition to a definitive showing of intent, other factors to consider include timing and conduct. When it comes to imposing time of the essence by notice, the date provided in the notice must afford the other side a reasonable period to close. As is customary, reasonableness will be determined based on the surrounding facts and circumstances. This includes the parties’ course of conduct, potential hardship, relative sophistication of the parties and their good faith. For example, a party may be estopped from enforcing an otherwise effective time-of-the-essence clause or notice upon a finding that the conduct of the party seeking enforcement amounted to a waiver of the time-of-the-essence requirement.

Whether incorporated in a bilateral contract or invoked in a unilateral notice, time of the essence can be a powerful tool. When intent is evidenced in a clear, distinct and unequivocal manner, a time of the essence clause or notice will be strictly enforced absent a waiver or attempt to impose an unreasonable closing period. Like most tools, however, it is most effective in the hands of a party with full understanding of its legal limits and potential pitfalls.

Mitchell S. Berkey ([email protected]) is a partner in the New York office of Jenkens & Gilchrist Parker Chapin LLP. He concentrates on commercial real estate transactions, disputes and workouts on behalf of owners, managers, lenders and corporate real estate users nationwide. A member of GlobeSt.com’s Think Tank, Berkey has also served as vice president with Merrill Lynch Hubbard’s real estate asset management group.