Why Shouldn’t Time Always Be Of The Essence?

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I know many readers are anxiously awaiting the final installment on SNDAs. You’ll have to wait (unless you can’t and then email imeislik@meislik.com for an advance copy). One mistaken click of the mouse, and “lo and behold,” here is what was planned for January 16.

Why shouldn’t Time (Always) Be Of the Essence? It sounds so good – make ‘em put up or shut up! After all, the contract was signed four months ago and the lender can’t fund the buyer on the sacred (Time of the Essence) Tuesday; in fact, it can’t fund until Thursday. And, in those four months, another potential buyer has come along who will pay more money. So, says the seller, let’s strictly enforce the Time of the Essence provision in the contract and grab the current buyer’s deposit, sign a new contract with the next buyer, and wait two months or more to close with that buyer (maybe). After all, Time was of the Essence. It was very, very important that the closing take place on that very Tuesday, not two days later – important enough that the seller is willing to wait yet another two months when it might (or might not) close on time. Does that make sense?

Of course it does (to the buyer, or more likely, to the buyer’s attorney). After all, a deal is a deal! – until, of course, the market has dropped out and the Time of the Essence closing is next Tuesday, but the tax lien releases won’t be here until Thursday, two days later, and the buyer says to its seller – “show up and deliver the promised title on Tuesday or we walk.” Then, the seller (or, more likely, the seller’s attorney) isn’t feeling so good.

Of course it makes no sense to put each other’s feet to the fire four months out. So, why is it the practice in some parts of the country, and elsewhere in the minds of a small number of (mostly) attorneys to make EVERYTHING TIME OF THE ESSENCE? This Ruminator’s wild guess – because they are afraid to think rationally.

What does making an obligation into a Time of the Essence obligation really do under the law? Basically, it attempts to make what would otherwise be an immaterial breach into a material default – a molehill into a mountain, a pimple into a nose, a municipal court matter into a federal case. But, courts are really pretty savvy when it comes to contract breaches. A judge’s job is to make “judgments.” And, judges are armed with “equitable powers.” This means that failing to send a notice on the required legal size paper isn’t going to result in the loss of a contract deposit. Similarly, if the ordinary, run of the mill closing doesn’t happen on the 90th day, judges think the 95th day is just as good (absent some real good and convincing reason). Plainly speaking, the five days just don’t seem “material.” Not trusting a judge’s judgment, the draftsperson who insisted on including a blanket provision that all time periods are “of the essence,” thinks doing so will make a difference. Yes, sometimes it will – i.e., sometimes, a court will enforce such a provision. Sometimes, it won’t. That state of affairs makes “nice business” for litigators, but does it really serve business people well? Do you want to close in a few days or maybe a few weeks, or would you rather litigate for a year to find out if you must sell the property to the original buyer or if you can find the “other” buyer with the higher offer from a year ago?

Why does this “doubter” say you might wait a year? Simple – because courts have lots of ways to nullify stupid things – they can construe facts in a way that is favorable to the “underdog.” They can reach into their bucket of maxims and find the one that says: “the law abhors a forfeiture.” Basically, they can (silently) ask – what is the right result here, and then make it happen. And, they do. “Stupid is as stupid does” – Forest Gump, J.S.C.

On the other hand, courts respect Time of the Essence letters that allow for a reasonable time for a closing to take place or for some other action to be taken. Yes, when the time has come and gone, you can still make Time of the Essence if, under the circumstances, it is reasonable to do so.

Courts look at the facts and circumstances, basically asking – “what’s behind this desire to make Time of the Essence.” Is there a legitimate need? Is the allotted time reasonable? Who will gain how much and who will lose how much? There is a big difference between a contract signed two days before the required closing date (where a court would almost certainly respect a Time of the Essence closing requirement) and one signed six months before the closing date.

One basic dividing line, conceptually speaking, is between events that are entirely in the control of the person who has to act, and those that are not. Making the time by which to give a notice into a Time of the Essence requirement is probably acceptable in almost all circumstances. Doing so when “performance” requires uncontrollable third parties to do something first, probably shouldn’t be tied to a Time of the Essence requirement in the original contract.

Certainly, case law varies from jurisdiction to jurisdiction, and yours might still slavishly adhere to a strict and draconian reading of a contract’s Time of the Essence provision, but don’t count on it. So, when a contract makes everything into a Time is of the Essence item just because you think this will get you “certainty,” the parties will often be very, very disappointed because, in many, many cases, it will create, not eliminate, uncertainty.

Brickbats and other items of similar character are cheerfully being accepted at www.retailrealestatelaw.com.

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Comments

  1. Ira, my take away here is that it’s better to have a “Time Of The Essence” clause because it cannot hurt to do so. The parties will realize that (i) it will be strictly enforced if the circumstances dictate that it is reasonable to do so, and (ii) not be strictly enforced when an injustice may result. I’d like to hear from Harvey Haber on this as I get the impression from prior posts that Canadian courts are more of the “strict constructionist” persuasion than US courts.

  2. Steve Noll says:

    Great explanation. I shared a link to this post on Twitter. Hope you don’t mind.

  3. Joel,

    You are correct.

    The Canadian Courts have taken a much stricter approach to a “time is of the essence” clause.

    Harvey M. Haber, Q.C.

  4. Ira, I agree with your take. I would not make time of the essence in a contract without a compelling reason. A lot of things can happen that might delay a scheduled closing for a couple of days which should not justify a forfeiture of the deposit and loss of the deal. You can always declare a time of the essence closing if the scheduled closing does not take place on time. Addressing Joel’s point, I would not want to structure a contract based on guesswork about when a clause will or will not be enforceable.

  5. Couldn’t agree more. It can be, as in your example, an opportunistic grab for the deposit….but when the jilted purchaser lodges a caveat over the property for their deposit and the vendor becomes unable to settle its new sale whilst dealing with the resulting lawsuit from the first, the vendor may find itself regretting that impulse decision.

    Far better to have a settlement date, a penalty rate for failure to settle, and a mechanism to give a reasonable deadline to front up (say a couple of weeks) that is reliably “time of the essence” or the cancellation follows.

  6. Lowell Berg says:

    Ira,

    Insisting on time of the essence “up front” in the original agreement for all time periods is a recipe for shooting yourself (actually the client) in the foot. As you and several others rightly point out, one can’t know at that point that your client will be able to meet all of its obligations by the “magic’ date. If your represent the Sellert, who knows what will show up in the title search! (How about a defective riparian grant?) And who hasn’t represented a buyer, who, for one of hundred reasons, wasn’t ready to close on the appointed date?

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