08/31/09: Time Is Of The Essence
By: Benny L. Kass
Q: Is there a default on the part of the buyer and consequently, liquidated damages apply (seller keeps the deposit) under the following scenario: the real estate purchase contract does not contain the words “Time is of the essence,” however, the contract calls for closing on July 31, 2009. The buyer obtains a firm loan commitment 15 days before the scheduled settlement date.
The closing did not take place due to the lender not giving a “clear to close”. The seller files a letter containing the words “time is of the essence” on August 10th, extending the deadline for the closing until August 14, 2009. The buyer’s financing is officially denied by their mortgage company on August 12th, but seller is not advised. Settlement does not take place.
What should the seller do next under these circumstances? The deposit is held in escrow by the seller’s real estate agency?
A: I don’t understand how a bank can initially give a firm loan commitment only to turn around later and deny that same loan. This is, however, a growing problem as the mortgage rules keep changing.
If your buyer really did get a binding loan commitment from her lender, she may have a good legal case to bring for breach of contract.
That, of course, will not help you, since you took your house off the market and now have not been able to sell it.
Let me first clarify an issue that is often misunderstood. When a buyer gives money to a title attorney or to a real estate broker, as the good faith earnest money deposit pursuant to a real estate contract, this money is held in escrow. And even if the buyer clearly is in default – which is not always the case -the escrow agent cannot unilaterally release the funds to the seller. For that matter, even if the buyer is not in default, unless the contract authorizes an immediate release of the escrow funds, the escrow agent cannot give the money back to the buyer.
Escrow is defined as ” a deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition” (Websters Online Dictionary). In practical terms, this means that when an escrow agent holds the earnest money deposit, these moneys cannot be released to anyone unless the parties agree in writing as to its disposition or a court specifically orders how the moneys shall be released.
In your situation, this means that you will have to convince the buyer that she was in default and further persuade her to release the deposit to you. Depending on the amount in question, this may not be easy; no one likes to lose money.
You may have to file suit to resolve the issue. You and your attorney should carefully review your sales contract. Is there a financing contingency? Is it clear in the contract that the buyer is in default should she not get financing on a timely basis? And what are the legal consequences when the buyer was first provided a loan commitment and subsequently lost it. This is an issue that the Judge will want to review carefully. My personal opinion is that there was never a final, irrevocable loan commitment, but of course I have not reviewed any of the documents.
In the Washington metropolitan area, buyers and sellers generally use the Regional Sales Contract drafted under the auspices of the Greater Capital Area Association of Realtors (GCAAR). Paragraph 11C of this contract contains the financing contingency, which reads as follows:
If Purchaser fails to Deliver Regional Form #100 and Lender’s Letter (if required) by the Financing Deadline, this contingency will continue, unless Seller at Seller’s option gives Notice to Purchaser that this Contract will become void. If Seller Delivers such Notice this Contract will become void at 9 p.m. on the third day following Delivery of Seller’s Notice unless prior to that date and time: (a) Purchaser Delivers to Seller Regional Form #100 and Lender’s Letter (if required); or (b) Purchaser Delivers to Seller Regional Form #100 and provides Seller with evidence of sufficient funds available to complete Settlement without obtaining financing. Upon Delivery to Seller of either (a) or (b) above, this Contract will no longer be contingent on Purchaser being approved for the Specified Financing and this Contract will remain in full force and effect. Prior to satisfaction or removal of the Financing Contingency, if Purchaser receives a written rejection for the Specified Financing and Delivers a copy of the written rejection to Seller, this Contract will become void.
In simple terms, if the buyer does not advise the seller within the time spelled out for this contingency that financing is not available, the contingency remains in full force. The burden is on the seller to set a deadline. However, a careful reading of this paragraph suggests that the contract may be considered void – and not a breach on the part of the buyer. This is a risk you run should you take the buyer to court.
Did it make a difference that you made “time of the essence”? Courts have long held that where no time is specified for the performance of an act, the law will imply that it must be done within a reasonable period of time. You gave the buyer four days in which to go to closing. Once again, the Judge will have to decide whether this was a “reasonable” number of days.
Finally, a threshold question will have to be decided by the Judge. The buyer will argue that pursuant to the terms of paragraph 11 of the contract, the financing contingency remains in full force since you did not deliver the appropriate notice that the contract will be voided. You, of course, will take the position that irrespective of the financing contingency, the buyer agreed to go to settlement on a fixed date – and you actually extended this date – and since there was no settlement, the buyer is in default.
I suspect you will win this battle – but it will be time consuming and expensive. More importantly, unless you modified your listing agreement with the real estate brokers, so that the commission is only earned if settlement takes place, you may have to give the agents half of any recovery you may get from the court.
Litigation is time consuming, expensive and always uncertain. There are too many legal issues involved in your case. My suggestion: try to reach an amicable settlement with your buyer. She may have the same concerns about litigation and may be willing to reach a compromise. If so, you both should sign a letter authorizing the escrow agent as to how the funds should be disbursed.
– Boilerplate –