By Victor Metsch
Whether it’s a $50 million dollar Manhattan building or a cousin’s beach bungalow, the problems are the same: financing fell through, the purchaser failed to bring the down-payment when he was supposed to, or the building tripled or halved in value between the signing date and the closing date of the contract.
When there is reason to fight over a real estate contract, “Time of the Essence” notices matter.
To the court, even in the hallowed formalist ground of real estate transactions, a contract to close on a certain date does not mean one must close on that date.
Unless the contract specifically says time is of the essence, the deal is binding even after the closing date.
But after that day goes by without a closing, either party can make time of the essence and create a “law date” that is a real last chance to close.
THE ABSURDITY OF THE FACTS
It is the facts that make “Time of the Essence” cases interesting: when a down payment for a few hundred thousand dollars has been paid, the facts begin to get strange, almost by design.
Because breach-of-contract actions require a showing that the complaining party performed or was ready to, each party—for its claim or counterclaim—wants to show that it was ready to perform but the other party wasn’t.
In Christopher St. Operating Inc. v. 189 E. Third St. Realty, LLC, 2010 NY Slip Op 30141(U), (Sup. Ct. N.Y. Co. Jan. 19, 2010), the plaintiff’s two principals, a representative of its lender, its title closer, and its attorney arrived at the offices of the defendant’s attorney to close on the law date.
They sat in the conference room and, after briefly meeting the defendant’s attorney and then being left alone for over an hour, concluded the defendant was not ready, willing, or able to close title, and walked out.
But contrariwise in Christopher (the same case), the defendant’s attorney was stunned when the plaintiff’s two principals showed up unannounced at his office with an attorney he had never met before, claiming they wanted to close.
He called the defendant, who began the trek to the office, and then he began getting together the documents that the plaintiff’s attorney asked for, providing the proposed deed, the Articles of Organization of the defendant, a copy of the satisfaction of the mortgage, relevant gift tax returns for 2002, and more.
After he shuttled between his office and the conference room for an hour to collect and provide the documentation, the plaintiff’s team walked out before the defendant even arrived.
The story is fun for a reader because it is absurd, like a settlement conference inside the surrealist landscape of an Escher painting.
But it also raises triable issues of fact, which means one has little hope of summary judgment. And so, like many of the conflicts in time-of-the-essence cases, it hits the client in the wallet.
In Champion v. Blue Water Advisors Inc., 2010 NY Slip Op 30848(U) (Sup. Ct. N.Y. Co. Apr. 9, 2010), Champion and Blue Water entered into a mutual “Time of the Essence” agreement designating a closing date (June 2, 2009) and a slightly later law date (June 9, 2009).
When the plaintiff buyers showed up with a $5 million cashier’s check on both dates, the defendant—Blue Water—refused to close.
Not content to be in default of its obligation, Blue Water sent the Champions a new, unilateral “Time of the Essence” notice for a closing on Aug. 15, and counterclaimed for breach of contract when they failed to appear at the August “closing.”
This was ridiculous, another demonstration of the absurdity of the facts: a new time of the essence notice, sent by a party after it fails to meet its time of the essence obligation, does not magically extend the term of the contract.
It was not officially ridiculous. Officially, it was simply a contention without merit. In keeping with their names, William and Marianne Champion won their down payment.
Equity is the foundation of “Time of the Essence” notices.
Real estate transactions are frequently held up by a day or two because of the standard frictions of the world, whether financing delays or bad weather.
It would not sit well with most of us to make someone lose their dream home or the fruition of a commercial purchase years in the making because of a day’s delay in financing.
Equity therefore opens the door for the legal realists, the delinquent purchasers, the inexperienced buyers, and the twists of chance.
Before looking at the technical requirements of “Time of the Essence” notices, consider their foundation in equity by looking at Miller v. Almquist, 241 A.D.2d 181, 671 N.Y.S.2d 746 (1st Dept. 1998), an important “Time of the Essence” case in the First Department.
In Almquist, the Millers tried to buy a neighboring apartment to make room for their two young children and Mrs. Miller’s disabled sister, who would be coming to live with them.
On April 1 the sale was supposed to close, but there was a financing delay and the parties agreed to a new closing on April 16, with Almquist now claiming time was of the essence.
On April 14, for the first time, the lender’s attorney asked the buyers how they intended to resolve certain tax liens that they had paid years ago.
The Millers provided proof of satisfaction of the liens, but by the time the lender approved the funding it was too late to schedule a timely closing; the lender proved unable to close until April 18.
But after the Millers failed to close on April 16, Almquist refused to sell. The First Department, listening to Equity, forced the sale to the Millers, noting that “If the sellers had extended the usual courtesies under these circumstances… neighbors might have parted as friends.”
THE REQUIREMENTS OF A TIME OF THE ESSENSE NOTICE
When one makes time of the essence, one must do so equitably: the notice must speak clearly, give the other party a reasonable time to act—usually a month—and state plainly that if they fail to close on the new date, they will be in default.
There must be no room for ambiguity or for the wheedling of malcontents; “Time of the Essence” notices must be clearly written and must say that the buyer will be in default if he fails to close before a given date. After all, what good is a notice that doesn’t say what it means?
In Nehmadi v. Davis, 63 A.D.3d 1125, 882 N.Y.S.2d 250 (2d Dept. 2009), after a contract to purchase a $4.65 million property in Long Island ran into trouble, the buyer sued for specific performance of the contract.
The seller sent two letters: one to the buyer advising of a scheduled closing, “time being of the essence,” and the other to the buyer’s attorney indicating that the buyer would forfeit his down payment if he failed to close on the law date.
But under the terms of the sale, notice had to be given to the buyer directly, not merely to his attorney.
The court held that because the letter to the buyer failed to inform him he risked default by not appearing at the closing, the notice had been ineffective. Because the notice had not been effective, the buyer was not in default. Because the buyer was not in default, the seller could not obtain summary judgment either to keep the down payment or for a dismissal of the buyer’s cause of action for specific performance.
Contrariwise in Decatur (2004) Realty, LLC v. Cruz, 73 A.D.3d 970,901 N.Y.S.2d 368 (2d Dept. May 18, 2010), the Second Department considered a notice clearly advising that time was of the essence, that “the law date… is [thirty days after this notice]” and that unless a closing date were scheduled by the law date, the contract would be null and void. The notice was valid and the court dismissed the claim for specific performance.
A “Time is of the Essence” notice must give the other party a month beyond the date of the notice, or at least a month beyond the initial closing—otherwise, one runs a substantial risk of the other party being able to force a sale or keep a down payment. (A month beyond the notice is the best policy.)
Technically a “reasonable time” is required and reasonableness turns on the facts of the case, but as a rule of thumb, 30 days is almost always reasonable.
In Decatur, a unilateral “Time of the Essence” notice that gave 30 days’ notice was adequate for the Second Department.
Contrariwise in Latipac Corp. v. BHM Realty LLC, 2010 N.Y. Slip Op 31239(U) (Sup. Ct. N.Y. Co. May 18, 2010), the Supreme Court, New York County, found that when only three days were granted in a time of the essence notice, a buyer properly stated a cause of action for return of its deposit.
In Almquist, 17 days after closing and 16 days after notice was an inadequate time under the circumstances. But in Champion, a mutual Time of the Essence notice allowing 31 days from the original closing and only 18 days after the notice was reasonable.
Real estate closings do not have to occur on the closing date, and time is not always of the essence. Thirty days and clarity are usually needed to make it so.
Absurdities gumming up the facts as in Christopher Street will raise the price of litigation and increase the transaction costs of getting a client his money, but if the equities are on his side and he is a Champion he will win in the end.
Victor M. Metsch is a Senior Litigation Partner at Hartman & Craven LLP. Tom White, Georgetown Law student and a Summer Associate at the firm, also contributed to this article.