Daily Development for Friday, March 11, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

VENDOR/PURCHASER; SPECIFIC PERFORMANCE; TIME OF ESSENCE; PARTY’S RIGHT TO MAKE TIME OF ESSENCE: Although either party may unilaterally declare time to be of essence by so declaring and by establishing a reasonable set closing time, such declaration will not be effective where: (1) other circumstances indicate that the party would not, in fact, suffer injury if the closing were not held on time; (2) the party making such declaration is not itself prepared to perform, or has stated it will not perform, the conditions precedent to closing.

Marioni v. 94 Broadway, Inc., 866 A. 2d 208 (N.J. App. 2005)

This case strikes the editor as a great casebook case - full of relatively clear holdings with clear explanations; and it answers, or at least presents, a number of good “what if’s.”

In August, 1998, Seller contracted to sell certain commercial property to Buyer.  The property was occupied at the time of contract, and the understanding was that Seller would evict the tenant and deliver the premises “broom clean,” but otherwise in “as is” condition.

It took Seller an extraordinarily long time to get rid of the tenant, and the tenant was not out until the end of October, 2000.  Then the parties.  apparently toured the premises, accompanied by a property restorer, Lindner [he’ll pop up later].  According the plaintiff’s allegations, the structure was “extensively littered with old furniture, office equipment, prop materials, old clothing  and general debris.”  The back lot contain[ed] several containers, two motorcycles, a burnt out car, some rubber tubes and a very large pile of general items piled in the back.”  Obviously the old tenant didn’t leave on good terms.

The parties fell into a dispute about the relationship between the “as is” clause and the “broom clean” requirement.  Apparently some of the dispute had to do with whether “broom clean” required that the seller clean out the yard, as opposed to just the building.  But the seller took the position that it was not required to clean out anything, inside or out.

Apparently after some verbal sparring, the seller’s lawyer sent to the buyer’s lawyer a letter on October 24, 2000 indicating that the seller did not intend to remove anything further from the premises.  Having already spent thousands getting rid of the tenant, “[h]e is not willing to do anything else to bring this matter to a close.”

The letter further stated a time of essence demand for closing: “Time is hereby made of the essence for a closing on November 7, 2000.  Should your client fail to take title on that date, we will take all appropriate action.”

Nothing happened on November 7, and on November 17  Seller sent Buyer a letter enclosing a check for the deposit amount and declaring that he was instructed by Seller to do so because buyer had “breached the contract” by not closing on the date Seller had set.  But a week after that Buyer’s counsel returned the check and reiterated Buyer’s position that the contract required “broom clean” condition, and that Seller had refused to comply.  Buyer’s counsel also offered to address the problem by setting up an escrow of $12,500 and, apparently capping cleanup costs at that. By December 1,  the seller’s counsel had agreed in writing to this escrow arrangement and the two lawyers ultimately set a closing for January 3, 2001.  According to New Jersey practice, the buyer’s counsel filed a “notice of settlement” on December 13, 2000.

Meanwhile, Seller was “running around his lawyer” and, in fact, working with another lawyer in negotiating a separate sale of the property to none other than Lindner - the clean up guy.  Lindner was fully aware of the original dispute over clean up, as he’d been there when the parties had argued.  Seller had shown to Lindner Seller’s “time of essence” demand to Buyer, and told Lindner that Buyer hadn’t met the closing deadline and that Seller was now free to sell to Lindner.  Lindner filed a “notice of settlement” in the land records on December 11 and closed on December 18.  His title examiner did not check the records past Lindner’s posting of his notice of settlement and never found the notice of settlement filed by Buyer.

Buyer joined Seller and Lindner in a specific performance action, claiming that Lindner had actual notice sufficient to trigger a further inquiry of Buyer’s rights, and constructive notice through the December 13 notice of settlement of Buyer’s intent to close.  The lower court first enjoined any further transactions in the property by Lindner while the court sorted things out, but later started tipping toward the Seller’s side and released its order in May, 2001, and refused rehearing on this point.  Buyer asked for leave for an interlocutory appeal, but that was denied.  So the case wandered on to other substantive issues and the orders releasing the injunction became final and appealable only after final resolution - summary judgment for Seller and Lindner, entered two years later.  The appeal from that final resolution took another two years, and as of the time of this decision, of course, almost four years had passed during which Lindner had the property not subject to any ju

dicial restraint (but with knowledge of the pending litigation.)  At the outset of the hearing on appeal, Lindner had attempted to enter new evidence affecting the equities of granting specific performance at this late date, and the court had refused to permit such evidence.

Notwithstanding all the tipping to Seller’s side, the appeals court here determined that in fact Seller had wrongfully set a “time of essence” for performance when it itself was in breach, that Seller was bound by its attorney’s negotiation of an escrow settlement, and that Lindner was “on notice” of Buyer’s claims and did not take free of Seller’s rights.  Therefore, the court reversed summary judgment for Seller and concluded that the lower court should have awarded specific performance to Buyer.  It remanded to now listen to Lindner as to whether any equitable bar had arisen to preclude Buyer’s enjoying its remedy now, but noted that Lindner was on shaky equitable grounds.

In the substance of the opinion, as noted, there are some real analytic gems.

On the question of setting time of essence when the original contract does not, the court said that either side may independently set time of essence for closing, and that in fact even when the contract is silent, time may be deemed of essence if other factors indicate that  this is appropriate. The unilateral declaration that time is of essence must be reasonable, and the relatively short time the seller used here to close, following two years of dithering concerning the tenant, struck the court as problematic.

In any event, the parties’ agreement to reschedule the closing for later would have waived any claimed breach by the time of essence.

The court, however, deemed the above discussion largely moot because the seller could not validly set time of essence and then declare a breach when in fact the seller is refusing to perform as required by the contract.  Although the court admitted that there might be some legitimacy to the argument that “broom clean” didn’t require clean up of the yard, and that the “as is” provision might therefore leave the buyer stuck with the debris in the yard, there was no need to reach this question because the seller had refused to remove the debris inside the premises, and thus clearly was in breach of the “broom clean” condition and could not demand that the buyer perform despite that.

As to whether the escrow agreement negotiated by Seller’s attorney was valid even when Seller was running a “counterclosing activity” behind that attorney’s back, the court held that the seller had clothed its attorney with apparent authority to continue to negotiate on its behalf when it instructed the attorney first to set time of essence and later to return the escrow deposit.  In both cases, the attorney stated that he was acting according to Seller’s instructions.  The buyer was therefore justified in concluding that the further negotiations concerning the escrow arrangement and the new closing date were also being carried out pursuant to the seller’s instructions.

As to Lindner, it was clear that Lindner was aware of Buyer’s prior contract and even of the dispute concerning the premises.  Lindner had seen the letter by which Seller had purported to reject Buyer’s contract, but this didn’t mean that Lindner was entitled to rely on Buyer’s acquiescence in this letter without asking.  The court also discussed at some length the issue of the warring settlement statements filed in the property records.   Recall that Buyer’s statement was filed after Lindner’s filing of a settlement statement, but before Lindner’s closing.  Under the circumstances of this case, the court found that Lindner was on constructive notice of Buyer’s filing, since it derived from a contract preexisting Lindner’s filing and Lindner knew of it.  This should be valuable analysis or New Jersey lawyers analyzing this statutory procedure, which the editor believes is relatively unusual, if not unique.

Comment 1: The case contains a number of juicy quotes from Pomeroy and others indicating that, in fact, in land transactions, specific performance may be virtually a matter of right, and in any event judicial discretion is somewhat limited.  Still, it concluded that it was only fair that Lindner be permitted to show why specific performance four years after the original dissolution of the injunction preventing Linder from mortgaging or leasing the property might be unfair.

Comment 2: What about third parties dealing with Lindner in the interim?  One Florida case might be instructive:  Slachter v. Swanson, 2000 WL 1187811, 25 Fla. L. Weekly D2008 (Ct.

App., Fla., 3d District, 82/3/00). (the DIRT DD for 10/30/00)   In Slachter, an owner of property had obtained a judgment cancelling Slachter’s mortgage.  Slachter appealled, but the notice of appeal was not filed in the land records and the reversal in Slachter’s favor was not entered into the trial court records for some years after it was rendered.  In the meantime, the owner had sold the property to Swanson, who claimed that she took free of the Slachter mortgage as she had no actual or constructive notice of it.  The court held that a transferee of real property is on constructive notice of fact that any judgments shown in the record might be subject to appeal, and has a duty to inquire in the court records to determine status of any such appeal.   Here, although there was no indication of the reversal on appeal in the land records, a check with the court clerk’s office would have shown the existence of the appeal and a check with the appeals court clerk would have shown the

resolution of the appeal in Slachter’s favor.  The mortgage was good.

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