Daily Development for Wednesday, March 31, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
 

VENDOR/PURCHASER; “TIME OF ESSENCE;” WAIVER: Although, where “time of essence” clause exists, contract terminates automatically when buyer fails to accomplish required acts before deadlines set in contract  , the clause can be implicitly waived, and contract reinstated, where seller where seller continues o cooperate with buyer in preparing for closing following expiration of a deadline for either a condition or closing.

Galdjie v Darwish (2003) 113 CA4th 1331, 7 CR2d 178 (Cal. App. 2004)

Buyer, a broker acting in his individual capacity, entered into a contract for purchase of an apartment building.  The contract provided that it would close April 9, and had a “time of essence” clause.  The seller, however, knew that the buyer was having a difficult time finding a loan and continued to work with the buyer to assist him in providing information to lenders in an effort to get a loan.

The buyer got his loan commitment on May 12.  Of course, it would take still a few days longer for the buyer to actually fund the committed loan.  On May 13,  however,  seller sent a notice to the escrow canceling the deal.  This led the buyer to sue her for specific performance.

The buyer prevailed both at trial and on appeal.  The court focused on the fact that the rigid language in the contract providing for termination if the deadline for loan commitment or the final date for closing were not met, and concluded that, although this language could result in an “automatic” termination of the contract if operative, could be waived (and here, was waived) by the actions of the parties.

The court’s analysis showed that no specific or formal waiver is required.  All that needs to happen is that the party with the right of cancellation take actions after the circumstances supporting cancellation have occurred that indicate that the party does not view the contract to be terminated.  Here, the seller’s continued cooperation with the buyer throughout the extended closing period indicated that she did not view the contract terminated and was not standing on the “time of essence” provision.  Under such circumstances, the seller had a duty to “reinstate time of essence” by a proper notice to buyer.

In fact, the seller had sent a notice on April 1, informing the buyer that closing must occur by May 13.  But the court held that after that notice the seller continued to cooperate with the seller in seeking to obtain a loan, even when it was clear that such loan, even if obtained, could not close by the May 13 deadline.

Comment 1 (by noted California commentator Roger Bernhardt): I think [the decision] was right, but the explanation given by the court casts more fog than sunshine on the issue of why the seller was not entitled to withdraw.

 The court's opinion was to the effect that, but for the seller's conduct after the April 9 closing date, which waived the deadline (and a tendency on her part to "manufacture evidence after the fact"), the contract would have automatically ended on that day. The court endorsed the statement from a 1992 decision that "where the parties have made time of the essence of the contract, at the expiration of time without tender by either party, both parties are discharged." Pittman v Canham (1992) 2 CA4th 556, 560, 3 CR2d 340. While Miller & Starr do not think that is really the rule (nor do I), attorneys advising buyers should warn them that that can happen unless certain steps are taken.

The starting point is a contract that includes a closing date which does not make time of the essence. (A more fundamental starting point might be a contract that does not even include a closing date, as in House of Prayer v Evangelical Ass'n 113 CA4th 48, 7 CR2d 24 (2003) ; but that occurs too rarely to take seriously.) Theoretically, the rules are the same whether it is the seller or the buyer who is late, but because buyers seem to need more time coming up with the money than do sellers to get their titles in order, let us suppose the buyer is late: If time is not made of the essence, it is treated as nonessential, meaning a buyer can pay late and his seller must accept it; since a court will always give the buyer reasonable time to perform, the seller might as well do the same. The best strategy for the seller to follow is, either before or when the specified day arrives, to set a new date, reasonably far away, and to inform her buyer that she will withdraw if he has not performed by then.

Does the presence of a "time of the essence" clause make such advice unnecessary? This opinion seems to say yes, disagreeing with the conclusion of Miller & Starr that the weight of authority is the other way. (Although I said the same back in 1967 when I wrote, "At best the [time is of the essence] clause seems to permit a party to insist on the contract date and, after timely tender and notice, to reject belated attempts at performance by the other." California Real Property Sales Transactions §11.7 (Cal CEB 1967)). Under the Miller & Starr/Bernhardt reading of the cases, the contract terminates on that day only if (my italics) the seller has given the buyer an appropriate "drop dead" notice beforehand.

If the Pittman/Galdjie rule is correct, however, then a buyer goes out of contract if he does not have his down payment and loan funds in escrow by the original closing date. He is saved only if his seller said or did something to the contrary that is held to have effectively waived the closing date; mere tardiness would not be enough. Under that principle, a seller who wants out need only keep her mouth shut before the closing day and afterwards notify everybody that she has withdrawn. And a buyer, foreseeing delays, ought to do everything possible to get the seller's written consent to an extension in advance.

Bernhardt Comment 2:  Given the existence of inconsistent rules on this question, attorneys should counsel their clients on the basis of a worst-case scenario, advising a buyer that he risks being out of contract if he fails to either perform on time or get a provable extension giving him more time; and, in the case of a seller, instructing her to send a notice in advance when she wants to terminate even though there is a "time of the essence" clause.

A seller should also satisfy the possible additional requirement of performing, herself, all concurrent conditions fully and on time. She should be sure to deposit her deed in escrow before sending any termination notice. (It is so easy to actually send a deed to the escrow agent that it is unwise to tender that performance instead, thereby inviting a dispute over whether those acts really did amount to a satisfactory "tender," a not very clear concept in the first place. The escrow instructions themselves always call for nondelivery of the deed to the buyer until he pays, which is protection enough.) The presence of the standard escrow clause-providing that if escrow does not close on time, the escrow agent should close as soon as possible thereafter unless one of the parties had previously sent a written cancellation-may change some of this. Thus, if the "time-essence" clause was held to make time absolutely essential, a court could say that the language in the escrow instructions nevertheless converted automatic discharge into discharge only after notice (although there was such a clause in Galdjie). If the clause was held to make time only potentially essential (i.e., a warning notice still had to be sent), it would still generate questions about the interrelationship of the different notices that should go to the buyer and the escrow agent, and whether one can perform the function of the other. The additional presence in the contract of a clause authorizing the broker to extend the time for performance will create even more complications, its effect possibly depending on whether the broker was the seller's agent, a dual agent, or the buyer's agent.

Bernhardt Comment 3: Many other clauses that deal with the right to extend a contingency period rather than a performance deadline add further uncertainty to all of this. Lawyers can live under almost any set of rules, but in too many residential cases, buyers and sellers are on their own and without legal guidance. Since instructive legislation is unlikely, and it is even more unlikely to expect people to return to the old practice of having attorneys draft their sale and purchase contracts for them, I wish that publishers of legal forms would improve their products to give the parties clearer, and more, consequences to choose from rather than simply to leave the omnipresent "time is of the essence" clause as it is

Roger Bernhardt is a professor at Golden Gate Law School in San Francisco.  His remarks are reprinted with permission from the California Bar CLE Real Property Reporter.

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