by Marilyn E. Tomei, Associate Legal Counsel
Is a party in breach of the purchase contract if closing does not occur by the date stated in the purchase contract? This question is one that is frequently asked by licensees as well as by members of the general public, who wonder if a buyer or seller of property can consider the other party in breach of the purchase contract under those conditions. The answer depends upon the wording of the contract: Does the contract have a "time is of the essence" provision?
The standard offer to purchase and contract form (Standard Form No. 2 jointly approved by the N.C. Association of REALTORS® and the N.C. Bar Association). provides a blank in which the parties may insert the projected date on which the transaction should close. Unless the words "time is of the essence" are added to the contract, the law implies that the parties intend for the contract to be viable for a reasonable period of time after this date Therefore, in the absence of such a provision, neither party can automatically consider the other party to be in breach of the contract simply because a closing has not occurred by the stated date.
Real estate brokers and salesmen who represent sellers may feel that in order to protect their clients, they should insert a "time is of the essence" provision.in every contract they complete. However, in some situations, this provision may, instead. serve to benefit the buyer or may not benefit either party. For example, assume that the parties have agreed to a contract written on the standard form. Pursuant to Standard Provision 8 of the form, the buyer has the property inspected, and the inspection report indicates that the air conditioning unit is in need of major repair Although the seller agrees to have the repair made, he is told that the unit can not be repaired for at least two weeks. which is beyond the closing date stated in the contract. If the contract contains a "time is of the essence" provision, the seller may lose the sale due to his inability to have the repair completed by the closing date.
Likewise, a buyer may feel protected with a "time is of the essence" provision when, in fact, it works to the seller's advantage. Case in point: A buyer's offer to purchase contains a loan contingency providing that the buyer must obtain a loam commitment by a given date, and "time is of the essence," but the lender is unable to process the buyer's loan application by such date. Meanwhile, another buyer who is willing to pay a higher price submits a "back-up offer." The first buyer loses the contract.
In each of these examples, if the real estate agent had not included a "time is of the essence" provision in the offer to purchase, the respective party would have had a reasonable period of time beyond the projected closing date to comply with the requirements of the contract. The question then arises, "What is a reasonable time?" The answer depends upon the particular circumstances of each transaction. Perhaps a shorter period of time would be reasonable in cash and non-qualifying loan assumption transactions, with a longer time-frame being reasonable in transactions where the buyers must obtain financing from a government-backed loan program requiring numerous inspections and documents.
The Real Estate Commission recommends that agents use caution with regard to "time is of the essence" provisions. Sometimes, such provisions are both appropriate and advisable, such as when it is essential to either the buyer or seller to close the transaction rapidly. The Commission further cautions, however, that if either party requesting the "time is of the essence" provision has any questions about the pros and cons of including it in the contract, that party should be referred to a private attorney.