Real Property Buyer Never Declared Seller in Default:

This was originally posted on the SGR Blog.

Can Purchaser Nevertheless Recover Down Payment?

Contracts for the sale of real property as often as not initially provide for an “on or about” closing date–with time not being of the essence. But what happens when the closing date passes and the buyer subsequently contends that the seller could not deliver clean title as required by the contract? May the buyer recover his deposit without first setting a time of the essence closing date before which the seller can clear the title defect?

In November 2006, Fermin Xelo entered into a contract to purchase residential real property from Ena M. Hamilton for $854,900.  Under the contract, Xelo paid a down payment of $15,000, deposited in the escrow account of Hamilton’s attorney, Michael Singer. The contract provided that the closing was to occur on or about 60 days after the execution of the contract.

Xelo subsequently obtained a mortgage commitment, which was valid until February 25, 2007; however, no closing was scheduled or occurred before that date, as Hamilton was unable to vacate the house. Further, a title report had revealed a violation on the property related to occupancy of the basement.

Xelo obtained a second mortgage commitment for a smaller loan and sought a reduction in the purchase price, which was rejected by Hamilton. When Xelo applied for a third mortgage commitment, and the application was denied, Hamilton offered to cancel the contract on the condition that she be permitted to retain $3,000 of the down payment to cover certain expenses relating to the cancellation of the contract.  Xelo rejected that offer, declared Hamilton 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 the down payment. Hamilton responded by setting a “time of the essence” closing.  Xelo responded that he would not close and again demanded the return of the down payment.

Xelo then sued Hamilton and Singer to recover damages for breach of contract in the amount of the down payment and the cost of title reports, appraisals, and loan application fees. Hamilton counterclaimed for a judgment declaring that she was entitled to retain the down payment. The matter proceeded to a nonjury trial, after which Supreme Court determined that Xelo was entitled to recover from the seller the sum of $17,300 plus interest. The Court directed Singer to release the down payment held in escrow to Xelo and dismissed much of the counterclaim as sought a judgment declaring that Hamilton was entitled to retain the down payment. Hamilton and Singer appealed.

The appeals court found that Supreme Court erred in determining that Xelo was entitled to a return of the down payment where Hamilton breached the contract by failing to “close on the property free of violations.” Because Xelo never placed Hamilton in default.

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.  Where there is an indefinite adjournment of the closing date defined in the contract of sale, some affirmative action has to be taken by one party before it can claim the other party is in default; that is, one party has to fix a time by which the other must perform, and must inform the other that if it does not act by that date, it will be considered in default.

A vendee can recover their money paid on the contract from a vendor who defaults on law day without a showing of tender or even of willingness and ability to perform where the vendor’s title is incurably defective. Still, a tender and demand are required to put the vendor in default where their title could be cleared without difficulty in a reasonable time. Here, a rider to the contract of sale specifically provided that violations to be removed by Hamilton would not constitute objections to title, provided that Hamilton, at closing, deposited a sum sufficient to remedy the violations within 90 days from the date of closing.

The contract of sale did not set a definite closing date. The closing was effectively adjourned indefinitely when 60 days from the date of execution passed without a closing being scheduled. Yet, Xelo never fixed a time by which Hamilton had to perform. Further, it was incumbent upon Xelo to put Hamilton in default by tendering performance, demanding that Hamilton perform her obligations, and giving her a reasonable opportunity to cure the defects.  Under the contract, Hamilton specifically had 90 days after closing to cure the violations, provided that she deposited sufficient funds at closing and that such condition was acceptable to the lender. Contrary to Supreme Court’s finding, nothing in the contract required the parties, before closing, to agree on or hire an independent contractor to determine the proper amount for the deposit. Moreover, the self-serving and inconsistent testimony of one of the purchasers, without more, was insufficient to demonstrate that their lender would not close unless the violations were cleared beforehand.

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