In some real estate purchase contracts, it’s possible to come across the phrase “time is of the essence.” Usually proceeded by a specific date. This type of legal wording is different from the usual “on or about” when stating the closing date and can have highly unpleasant repercussions when misunderstood. So what exactly does it mean and what are the implications for both parties in a real estate transaction?
The closing date in real estate contracts
In most property sale contracts, the closing date is an approximation rather than a specific deadline. For example, the words “on or about Aug 30,” mean just that. The exact closing date can take place on any date, usually 30 days, before or after this date. This allows a little leeway for both buyer and seller as both parties may have some final things to settle. For instance, Co-op board approval or final renovations. But this can change when the contract includes or implies the “time is of the essence” clause.
The clock is ticking
The “time is of the essence” clause is a phrase in the purchase contract to remind all parties that the clock is ticking. Failure by one or the other party to close at or within that date can result in a breach of the contract and be subject to legal litigation. For it to be valid, the wording must make it clear that failure to close after that date will constitute a breach of the contract. The contract need not state the specific words “time is of the essence” for it to have legal effect. This is provided the notice gives a specific date and warns that failure to perform on that date will result in default.
It’s very rare to see it in the original contract of sale. If included, it must be agreed on beforehand with both parties to be valid. The more common way it pops up is if one party misses the closing date. The other party’s lawyer can then send a “time is of the essence” notice to close on a new date. Provided they give a reasonable adjournment period. Such notice will supersede the actual contract and can be sent by either party. In a buyer’s case, failure to close by the date given can result in forfeiture of the down payment. For sellers, they can be sued for the return of the down payment and any costs incurred by the buyers for the delay.
Time is of the essence for new developments
Buyers face some difficulties with this when it comes to new constructions. (Buildings that have yet to finish construction or are not approved yet for occupancy). So long as a Temporary Certificate of Occupancy has been issued, and an offering plan declared effective, a sponsor can issue a “time is of the essence” notice.
The problem this presents for buyers is that they can be presented with the notice out of the blue. Often after they’ve signed the contract months or even years before. Depending on how your attorney has negotiated the deal you may have the right to adjourn for ten to fifteen days. Buyer should be ready to close at any time once the building has completed construction, they have received a Temporary Certificate of Occupancy and have had the offering plan declared effective. The sponsor can then send a ”time is of the essence notice” with as little as 30 days to spare.
In general, a “time is of the essence” clause is more beneficial for the seller than the buyer as they have the assurance that there will be no delay. But it can also cause problems for sellers as the contract may require that they have a certificate of occupancy, or have made certain repairs before the sale can take place. If they cannot close on the “time is of the essence” closing date, they can be deemed in default and liable for damages. As such, it’s better to hold off on including the clause unless as a last resort.