As the authors noted in our first article on Time of the Essence (TOE) Closings, “real estate closings may be the most basic and common real estate experience, but the familiarity ends once a provision of the contract of sale has been breached.” See Bailey and Desiderio, Enforcing the Contract—Obtaining Down Payment or Specific Performance (New York Law Journal, March 8, 2006). This is because the circumstances attending each purchaser’s or seller’s failure to close on the TOE closing date is always unique, and this has resulted in an innumerable variety of judicial decisions applied to ever-changing real estate scenarios.

Nevertheless, nearly 20 years later, despite ever-changing circumstances, the rules that govern TOE closings remain essentially the same. “[W]hen a party to a real estate contract declares time to be of the essence in setting a closing date, each party must tender performance on that date, and a failure to perform constitutes a default.” Donerail Corporation v. 405 Park LLC, 100 AD3d 131, 137 (1st Dept. 2012). (Emphasis added).

Further, “[i]t is well-settled that absent a breach on part of the seller, a purchaser who defaults on a real estate contract without lawful excuse cannot recover its down payment.” Id. (Emphasis added). And, more recently, In 361 Broadway Associates v. Morales. 195 AD3d 497 (1st Dept 2021), the First Department restated the rule, holding that:

Plaintiff seller met its initial burden by presenting evidence of the agreement and that it was ready, willing, and able to close on the properly notified closing date,” and the “Option Agreement [which contained a TOE Closing date clause] expressly provided that if [purchaser] defaulted and ultimately failed to close, [seller] was entitled to keep the deposit.”

However, not all real estate contracts start off with a TOE clause. When a seller and buyer enter into a contract of sale for real property, and the contract does not specify a date certain on which the closing will occur, the contract normally states that the closing shall occur “on or about” a certain date. This is because there are usually several uncontrollable factors that affect each party’s ability to prepare for the closing, and neither party can know when each of them will actually be “ready, willing, and able” to close.

Under these circumstances, the parties may mutually agree to adjourn the “on or about” closing date, to accommodate each other’s needs. Nevertheless, even when they cannot agree, either party is entitled to a reasonable adjournment of the closing date. See Zev v. Merman, 134 AD2d 555 (2d Dept. 1987), affirmed 73 NY2d 781 (1988). In addition, in connection with sponsor-generated purchase contracts, for new condominium or cooperative units, the sponsor usually reserves the contractual right to adjourn the closing date at will. This is because of the many issues that can arise in the course of construction, which will delay completion of the building and/or its individual units and, in turn, delay issuance of the temporary certificate of occupancy (“TCO”) which is required before the closing on a particular unit may occur. See, e.g., 361 Broadway Associates Holdings, supra.)

Nevertheless, occasions arise when either the seller or the buyer to a real estate contract, which does not contain a TOE Closing Date, will want to speed the transaction to completion. It may then be necessary to convert an “on or about” contract into a TOE contract, because either the buyer or the seller defaults on the agreed “on or about” date and/or because the adverse party is suspected of engaging in disingenuous conduct to either unduly delay the closing or to possibly create a fallacious excuse to back out of the contract. See, e.g., Martocci v. Schneider, 119 AD3d 746 (2d Dept. 2014) (when the closing did not take place on the original closing date, the seller then scheduled a TOE Closing, the buyer presented pretextual reasons for not appearing on the TOE Closing date, and “the sellers satisfied their prima facie burden of demonstrating that they were ready, willing, and able to perform on the [TOE} closing date.”).

The Basics of Converting ‘On or About’ to ‘TOE’

The party desiring to schedule the TOE Closing must give written notice (the “time of the essence letter”), to the adverse party, declaring that the closing will occur on a date, place, and time certain, which will be “Time Is of The Essence.” Although it is preferable that the words “Time is of the Essence” be present within the “time of the essence” letter, the notice will still constitute a proper TOE notice, without those words, so long as the letter does advise the other party that it will be in breach of the contract, if the closing does not occur on the TOE date, and (a) if the buyer defaults, that the defaulting buyer will forfeit its down payment deposit for not closing, or (b) if the seller defaults, that the buyer will be entitled to commence an action for specific performance. See ADC Orange, Inc. v. Coyote Acres, Inc., 7 NY3d 484 (2006). (held: “[T]he mere designation of a particular date upon which a thing is to be done does not result in making that date the essence of the contract.) See also Bailey and Desiderio, Defining When “Time is of the Essence” (New York Law Journal, 5/9/2007).

The ”time of the essence” letter must schedule a “reasonable adjournment” of the closing date – one which, under the particular circumstances, may be deemed to give the defaulting party “a reasonable time to perform” the term or terms of the deal, which, as an excuse for not performing on the original closing date, the defaulting party may claim it cannot satisfy. See Coyote Acres, supra. Generally, attorneys will schedule the TOE Closing to occur thirty days after the date of the TOE letter.

However, there is no statute or court decision which requires a 30-day waiting period before conducting the TOE Closing. “Reasonableness” is determined on a case-by-case analysis. See Zev v. Merman, supra, in light of the nature and object of the deal as well as the previous conduct of the parties throughout the transaction. See, e.g., Miller v. Almquist, 241 AD2d 181 (1st Dept. 1998). In 2626 Broadway LLC v. Broadway Metro Associates, L.P., 85 AD3d 456, 457 (1st Dept. 2011), the court held that “a three-week’s written notice was reasonable under the circumstances.”

The ‘Performance’ Factors

At any real estate closing, but particularly at a TOE closing, the seller must demonstrate that it owns the property and that it has the ability to sell the property and deliver marketable title. See Bosco, Bisignano & Mascolo, Esqs. LLP v. Turyan, 8 AD3d 418 (2d Dept. 2004). Moreover, the seller must be ready to vacate at closing by hiring movers to actually vacate the premises to show that it was willing and ready. See Zev v. Murman, supra. On the other hand, first and foremost, the buyer must demonstrate that it has the ability to fund the balance of the purchase price due at the closing. It must show sufficient liquid assets to cover the differential between the loan amount and the contract price.

Non-Financial Pre-Conditions to Closing

As important as it is for the seller to be able to deliver marketable title, and for the buyer to be able to deliver the balance of the purchase price, to prove each party’s readiness to perform its contractual obligations at closing, a party’s ability to show itself ready, willing, and able to close, is also dependent upon the non-financial obligations it incurs under the written terms of the contract. Satisfaction of non-financial terms of the contract is also crucial in determining whether one or the other of the parties was “ready” and “able” to close on the scheduled TOE Closing date.

In Coyote Acres, supra, the Court of Appeals noted that the sale was conditioned upon the buyer’s obtaining subdivision and site plan approval from the town planning board for construction to be done on the subject premises. The court held that, for failing to set a TOE date for an interim payment due towards the purchase price, the seller was not entitled to retain the buyer’s downpayment because of only a two week delay in making that interim payment.

However, the court also held that the buyer was not entitled to specific performance, because, having failed to obtain the required government approvals, within the time specified in the contract, despite having obtained them eventually, buyer had nevertheless failed to carry the burden of showing that “it was ready, willing, and able to fulfill its contractual obligations” on the closing date.

In Grace v. Nappa, 46 NY2d 560, 564 (1979), a contract with a TOE clause, required the seller to produce “a recordable mortgage ‘estoppel certificate,’ to establish the outstanding balance of a mortgage encumbering the property.”

The Court of Appeals held that “[w]here a search of the title reveals an undischarged mortgage, a buyer is entitled to compliance with a contract provision requiring the seller to produce a certificate, in recordable form, demonstrating the outstanding balance of the mortgage accompanied by other pertinent information.”

Although the seller did not produce the required certificate “by law day,” seller attempted to prove the outstanding balance of the mortgage by producing canceled checks and an amortization schedule. The buyer refused to accept the checks and amortization schedule and other proposed substitutes for the certificate, and insisted on nothing less than what the contract required.

The Court of Appeals explained that the contract provision entitling the buyer to an estoppel certificate was a material term of the contract which excused the buyer’s performance and gave him the right to recover his down payment and the reasonable cost of the title search.

More recently, in Angelo Gordon Real Estate Inc. v. Benlab Realty LLC, 216 AD3d 420 (1st Dept 2023), the First Department followed Grace in a matter where the parties executed eleven interdependent contracts (“PSAs”) for several Manhattan properties which contained commercial tenants. The interdependent PSA’s provided that the mutual obligation to close was conditioned on simultaneous closings of the properties. If sellers failed to make a conforming tender under any of the eleven interdependent PSA’s, the plaintiff buyer was entitled to receive a refund of its deposit plus interest.

As a condition precedent to buyer’s obligation to close, the sellers were required to produce, at closing, tenant estoppel certificates which certified that:

Neither Tenant nor Owner-Landlord is in breach or default under the Lease, and Tenant knows of no event which, with the passage of time or the giving of notice or both, would constitute a breach or default under the Lease by Tenant or Owner-Landlord. (Emphasis added)

Instead of providing tenant estoppel certificates, the seller defendants [which the contract permitted them to do] “provided sellers’ estoppel certificates for certain of the commercial tenants,” but the First Department held the plaintiff was entitled to summary judgment because the sellers had breached a material obligation of the contracts. The court noted that “the sellers’ estoppel certificates stated that the owner-landlord was not in default under the lease, but, contrary to the requirements [of the contracts], omitted the language that the tenants were not in breach or default under the lease.” (Emphasis added). 

In addition, the court noted that the sellers had not only waived, but had actually refused to seek the opportunity to cure, and that “defendants’ failure to tender conforming estoppel certificates meant they were not ‘ready, willing and able to close’ on the closing date, thus excusing plaintiff from performing under the PSAs,” and entitling it to refund of its $12 Million deposit, plus interest.

Conclusion

Accordingly, it is important that practitioners take especial care in drafting their own clients’ real estate contracts, and in reviewing the contracts drafted by the other party’s attorneys, to consider under what terms and conditions one or the other of the parties (a) will be deemed to have either been, or not been, ready, willing, and able to perform its contractual obligations at closing, or (b) will either want to expressly declare a non-financial pre-condition to closing to be “time is of the essence.,” or require that the non-financial pre-conditions be subject to reasonably foreseeable circumstances which permit the seller or the buyer, as the case may be, an opportunity to extend the time otherwise required to satisfy the condition.

Giving the attention such issues require will likely prove well worth the effort when and if a dispute develops over whether one or the other of the contracting parties claims a default based on failure to meet a Time is of the Essence condition upon which performance or non-performance of the contract will be judicially determined.

Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C., and John M. Desiderio is partner and Chair of the firm’s Real Estate Litigation Group. Niaz Najafi, a firm extern and third-year student at the Maurice A. Deane School of Law 

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