What is Time of the Essence?
In New Jersey, the timing of a closing or other happening is generally not a material condition to the purchase and sale of real property. New Jersey courts recognize that when the buyer and seller pick a closing date early on, that the date is merely an estimate, and that both parties may require additional time to prepare for closing, satisfy contingencies, and get everything in order.
The material conditions of the transaction are generally the price, the property, and the documents required to convey title. This is true for both residential and commercial transactions. If a contract provides that the parties are to close on May 15th, and the buyer delays closing until May 20th for any number of reasons, the buyer is generally not at fault for having committed a material breach of the contract. If the buyer refuses to close at all, that’s another story and the seller can take several steps to enforce the contract.
However, if the seller had made time a material part of the contract—let’s say the seller needed the funds by May 15th to close on another deal—and the buyer was unable to close on time, the seller could seek damages. In other words, if the May 15th closing date was a material part of the contract, the seller would be entitled to damages for the buyer’s breach of contract.
When time is a material consideration of the transaction, that party must negotiate to make time of the essence (i.e. make time a material component of the contract).
How do you make Time of the Essence?
Whether time is of the essence of the transaction is up to the parties. This is something that would need to be negotiated. The contract would need to explicitly state that time is of the essence.
“Buyer acknowledges and agrees that TIME IS OF THE ESSENCE with respect to all actions required to be performed by Buyer on the Closing Date. Buyer acknowledges and understands that the timing of such actions is a material part of the Agreement. In the event Buyer fails to complete such actions on the Closing Date, Buyer will be deemed in default and Seller may terminate the Agreement immediately and retain the Deposit as liquidated damages.”
Unless the contract explicitly says otherwise, the timing will not be a material component of the contract.
Does this mean that if the contract calls for a closing on May 15th this year, that the buyer could delay for months or years?
The answer really depends on the facts and circumstances of a specific situation and what is reasonable in light of those facts. In some instances, it may be reasonable to delay closing for a year or more if an environmental condition is found to exist requiring administrative clearance and remediation. In another instance, a delay of two months may not be reasonable when all conditions have been met. The answer depends on the transaction and the negotiated terms of the purchase agreement.
Can I make Time of the Essence after the contract is signed?
Yes. Either the buyer or the seller can make time of the essence AFTER the specified closing date. If either the buyer or the seller fails to close, the other party can send written notice that time is now of the essence. The notice must provide for a reasonable time table considering all facts and circumstances.
For example, in a contract with an estimated closing date of May 15th, if the buyer fails to close on the 15th, the seller may send notice to the buyer that the deal must close and provide a new date. 14 days’ notice will likely be reasonable, but again, the date selected must be reasonable based on all facts and circumstances. See Ridge Chevrolet Oldsmobile, Inc. v. Scarano, 238 N.J. Super. 149, 156 (App. Div. 1990).
What remedies are available?
First, to enforce a time of the essence clause, the party seeking enforcement must show that it was ready, willing, and able to perform its contractual obligations on the closing date. Gorrie v. Winters, 214 N.J. Super. 103, 104-08 (App. Div. 1986).
Second, a well drafted contract could provide a set of remedies. In the clause referenced above, the seller could terminate the contract and keep the deposit. That’s a significant penalty that will motivate any buyer to satisfy its obligations.
Other remedies may include specific performance and out-of-pocket costs, though obtaining those remedies will generally require litigation.
When seeking remedies it is best to have those remedies built into the contract and avoid litigation.
A time of the essence clause is a powerful tool that can also backfire when not used correctly. For this reason including such a provision is not always a good idea. When used the language should be clear, concise, consistent with the other contractual language (for example, you can’t force a closing at a time when the buyer is still entitled to due diligence), and should be narrowly tailored to the relief sought by the non-breaching party.