Contributed by Nicholas Paindiris
Buyers and Sellers in real estate transactions often stress over the closing date. When closing on or before a certain date is critical to the buyer, the seller – or even to both parties – careful negotiation can ensure a positive outcome without tipping the scales in the other party’s favor at the bargaining table.
When is the closing date not actually the closing date?
With so much time-sensitivity surrounding the closing date, it’s important that buyers and sellers understand that the closing date they carefully agreed to in their contract may not be the date the closing actually takes place. When used in a contract, the phrase “time is of the essence” notifies the parties that failure to comply on a specific date will constitute an incurable breach. In fact, unless a real estate contract specifically uses the language “time is of the essence” in reference to the closing date, there is a good chance the date originally put in the contract will serve as merely a guideline.
The actual closing date is subject to, among other things, obtaining the “clear to close” from the buyer’s lender, resolving any outstanding issues with the title to the property (i.e., tax liens), confirming the property is in acceptable condition to the buyer and that the seller has complied with any requirements to clean and make repairs, attorneys and paralegals on both sides must prepare and review all of the documents – many of which are not made available by the lender until just days before the closing is scheduled – and, lastly, scheduling with the attorneys on both sides of the transaction.
The reality is that either party may ask for an additional few days, or even a few weeks, to postpone the closing and allow more time for the above items to be completed. Where the buyer or seller is very concerned with the closing date, it is recommended they discuss the possibility of using “time is of the essence” language in the contract.
Before you consider using “time is of the essence” in your contract, consider how it may affect your leverage when it comes to negotiations.
Don’t give away your leverage over a closing date.
As soon as one side, whether it’s the buyer or the seller, lets on to the other that it must close by a certain date, it gives away their leverage. For instance, if the buyer shares that the buyer is currently living in an apartment with a lease that is very soon to expire, and therefore needs to close by a certain date so the buyer is not left without a place to live, it gives the seller more leverage. Knowing this, the seller can refuse to meet the buyer’s demands to lower the price, to give the buyer a credit, or to meet the buyer’s demands that certain repairs be made after an inspection.
The same goes for the seller. If the seller makes it known to the buyer that the seller is about to purchase a different property, and needs the proceeds from this sale to be able to close on the other property, then the buyer has more leverage. The buyer can make demands of the seller that one would assume to be unreasonable, knowing that the seller is more likely to agree just to be able to close on the projected closing date.
A sure way to tip off the other side that you are in a time-sensitive scenario, thereby giving up a great deal of leverage, is by requesting the contract be made “time is of the essence”.
There are a number of work-arounds that can be made part of the contract to avoid the pitfalls of making the contract “time is of the essence”.
How to ensure closing takes place on a certain date without giving up your leverage.
Unless there is a compelling reason for time being of the essence, many attorneys will prefer to avoid imposing a firm deadline on themselves and the other side. In addition to sacrificing your leverage and bargaining power mentioned above, problems arise, accidents happen, illness, family emergencies, weather events, etc. can all cause unforeseen difficulty in keeping to a firm closing date.
Still, there are times where either the buyer or seller truly needs to close on a specific date, and not doing so will lead to inconvenience and additional expenses. In these cases, rather than require time be of the essence, an attorney may require the opposite party to be responsible for the “carrying charges”. For example, if a buyer postpones the closing by a week, then the buyer would be responsible for the weeks’ worth of additional expense incurred by the seller having to own and maintain the property for an additional week. Similarly, a seller who postpones the closing would be responsible for the replacement living expenses of the buyer, who may have had to secure lodging at a hotel and eat at a restaurant due to the postponed closing.
Such an arrangement creates an effective incentive for both sides to do everything they can to close as close to the projected closing date as possible, while not giving away too much leverage to the other side, as they will be financially responsible for any delay that they cause.
If you have questions about real estate purchases or sales, contact us with your questions.