Closing Dates & Time Is Of The Essence
In New York, every contract of sale for real estate, whether it’s a $4,000,000 ten acre estate $4,000,000 in Bedford Hills or an 875 square foot cooperative apartment in Manhattan, includes a provision that specifies a date when the transaction will “close,” meaning a date when the real estate transfers from seller to buyer.
Most contracts of sale will usually state that the closing will occur “on or about” sixty days from the date of the contract. The “on or about” language makes the closing date a moving target. This is done by design: all of the parties involved, including lenders, have their respective schedules, rights, and obligations to satisfy between contract and closing, so picking a firm date at the time of contract is a recipe that will likely fail. Rather, it’s a better practice to inject some flexibility into when the transaction will close rather than one party or the other being disappointed when a closing doesn’t occur on the exact date that was specified months earlier.
In an ideal world, every transaction progresses smoothly, the closing occurs about sixty days after the contract is signed, and the keys to the home pass from seller to buyer. However, there are transactions when the closing date comes and goes and the closing is still not yet scheduled. At that point, an attorney may issue what’s called a “time is of the essence” letter.
In plain English, “time is of the essence” pretty much means that the “on or about” language in the contract is no longer valid. It means that the attorney for one party is putting the attorney for the other side on notice that, if the closing does not occur within a reasonable amount of time, i.e., about 30 days, then the party who is not yet ready to close will be in default. If the party in default is the buyer, that means possible loss of the contract down payment.
This may sound like a very powerful tool that could allow a seller to pocket a down payment that may be tens or even hundreds of thousands of dollars. Or it could entitle a buyer to specific performance, meaning the property must be transferred to the buyer.
A time is of the essence letter is a warning that such consequences might occur if the closing doesn’t happen. However, your attorney does not want to be in such a position. Why not?
First, a seller and buyer are in contract because the seller wants to sell property and the buyer wants to buy it. Both sides have invested a significant amount of time and effort up until the point when a time is of the essence letter may be issued, meaning a letter that puts the other party on notice that a default is pending defeats all of the effort invested to date – a position in which neither party wants to end up in.
Second, I’m yet to meet a buyer who was comfortable with defaulting and walking away from a down payment that is usually in the tens, if not hundreds of thousands of dollars. Further, when representing sellers, issuing a time is of the essence letter which states the buyer is in risk of default and, therefore, at risk of losing their down payment, is a difficult situation for all parties involved, especially as the attorney holding the money in escrow.
Third, when a contract that is contingent upon a mortgage, a buyer might find his or herself ready to close but the lender hasn’t het cleared the closing. In that situation, a frustrated seller might request that his or her attorney issue a time is of the essence letter to the buyer even though it’s understood that the buyer is not the party causing the actual delay.
Finally, the majority of real estate attorneys (and real estate brokers) are compensated at the time of closing, so while it may seem like an attorney for the other side may be delaying the transaction, such assumption is usually inaccurate simply due to the economics of how attorneys run their firms.
So what happens if a time is of the essence letter is issued, another thirty days goes by, and the transaction still doesn’t close?
Give us a ring or email us and let’s talk about your options.