The closing provisions found in standard real estate sale agreement forms are usually quite simple. Generally, the closing clause itself does little more than establish a closing date. This simplicity belies the fact that closing clauses are among the most misunderstood and abused clauses found in real estate form contracts.
Strictly speaking, a “closing date” is not required in the sense that a date certain must be stated in the contract. Click here for a detailed discussion of the material terms of a real estate contract. Form real estate contracts, however, universally provide for a date certain for closing the transaction. This, of course, is very helpful if the parties actually close on that date. When they don’t, a not uncommon occurrence in residential real estate, you may find out just how misunderstood and abused a closing clause can be.
Contrary to popular belief, there is nothing special or magical about the closing clause. All things being equal, the closing clause, and the date it contains, is just another provision of the contract no more or less important than other clauses in the contract. That is not to say the closing date is unimportant, just that it is not unique or special in the eyes of the law. The parties simply agree at the time they enter the contract to conclude the contract not later than a certain date. It is no different in that respect than agreeing when to make the loan application or conduct the inspections or provide the preliminary title report or any of the host of agreed-to actions that go into a real estate transaction.
The closing clause in a form real estate contract is a sequencing provision. Like any number of clauses, the closing clause orders the parties performance by setting deadlines for performance. The closing deadline takes on importance only because it sets the time for the final performance of both parties. Closing dates matter because failure to perform the entire contract by that date is a breach of contract.
Breach of contract, though certainly serious, is less than half the story. It is a rare contract indeed that is performed exactly according to its express terms. Courts understand this and differentiate between those breaches which matter and those that don’t. A breach of contract that matters is considered a “material breach.”
A material breach is one that deprives the other party of an essential benefit of the bargain. Because it deprives the other party of the benefit of the bargain, a material breach excuses the performance of the non-breaching party. It is this little understood principal of contract law that gives closing dates their mythic quality. If the closing date is material, the buyer’s failure to close on time is a material breach which will excuse the seller’s performance. The seller can refuse to sell to a buyer who does not close the transaction on the required date – assuming, of course, that the closing date is “material.”
There are a variety of ways real estate forms make the closing date material. The old fashioned way, and the one still used in Oregon, is to preface the closing clause with the phrase “time is of the essence.” “Time is of the essence” is a legal term of art. Deadlines prefaced with the phrase are considered material. A more modern approach is to spell out the exact consequences of failing to close right in the closing clause. For instance, the closing clause used in the Arizona residential forms contain the following: “The parties to this Contract expressly agree that the failure of any party to comply with the terms and conditions of this Contract by the scheduled Close of Escrow will constitute a material breach of this Contract rendering the Contract subject to cancellation [under the cancellation provision of this Contract].”
In Oregon there is a common belief that the buyer’s failure to close by the date stated in the contract automatically cancels the contract. This virulent Oregon real estate myth is often expressed by saying the buyer is “out of contract.” “Out of contract” has no legal meaning. It is just slang. To the extent it is used to say one party thinks the other party is in breach, “out of contract” adds nothing. To the extent it is used to say the contract has somehow automatically terminated, it is mistaken and dangerous. The situation when it comes to the buyer missing the closing date is far more complex.
Using “time is of the essence,” instead of an express statement of materiality and cancellation, puts the burden on the seller to enforce the closing date. This is the case because courts are quick to find a seller who has not enforced the closing date has waived it. When, as is not infrequently the case, the buyer finds they cannot obtain the loan or clear a contingency by the closing date, they often ask for more time. Sometimes this is done in the form of an extension addendum. Other times, the buyer’s agent simply calls the listing agent and says the buyer is having some problem but will close as soon as the problem is solved. Either way, what has to happen, but usually isn’t happening, is the seller communicating an unequivocal intent to enforce the contract.
Absent an unequivocal intent to enforce the contract, the closing date can quickly become ambiguous. In the well known case of Tarlow v. Kelly, a jury found the seller had waived the “time is of the essence” clause simply because the seller allowed the buyer to continue efforts to find financing for some fifteen days after the closing date. According to the court, evidence that the seller did not demand timely performance and knew the buyer was continuing efforts to purchase after the closing date had passed, was sufficient to present a question of fact for the jury. The jury, the court ruled, “could conclude from them [the facts] that both parties proceeded after August 15 as though that date had no affect on the validity of their agreement and that [the seller] thereby voluntarily tolerated plaintiff’s late performance.” Click here to read the court’s full decision in the Tarlow case.
Enforcing a closing date, even with a “time is of the essence” clause, is about not tolerating late performance. The easiest way to create evidence that late performance was not tolerated is to give notice of the intent to enforce and then, based on that notice, enforce the deadline. Click here to view a sample notice of intent and notice of termination clauses. The only viable alternative to notice and enforcement, is a mutually agreed to written extension of the closing date. Anything less creates ambiguity.
Ambiguity can be avoided when the closing date approaches by explaining to the seller that there are only three possible outcomes on that date. The first, and by far the preferable one, is that the buyer performs the contract. The second is a mutually agreed upon written extension. The third is that the seller terminates the contract if the buyer fails to perform as required. It is in the exercise of the third option that real estate licensees have trouble.
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