It sometimes comes as a surprise to buyers and sellers – and to their agents as well – that it is not always clear when one party or the other has the right and ability to terminate a real estate purchase contract. At times this may be due to unclear or even contradictory provisions in the contract; but, even when the contract appears clear, the manner in which courts may deal with it cannot always be predicted.
The recent case of Marina Glencoe v. AMA Construction and Amidi Partners (California Court of Appeal for the Second District) is illustrative.
In August of 2004 Amidi Partners entered into a contract to sell their commercial property. The buyer was James Mesa or Assignee. The purchase price was $3,150,000, including a $90,000 deposit and a $1,102,500 down payment. Escrow was to close November 16, 2004. A number of provisions of the agreement related to the time of closing.
First of all, there was the somewhat standard provision that Time is of the essence of this Agreement. Secondly, Section 10.3(a) of the agreement provided that the cash portion of the purchase price be deposited into escrow no later than 2:00 P.M. on the business day prior to the Expected Closing Date.
The agreement also contained a section (8.8) which stated that The Closing shall occur on the Expected Closing Date, or as soon thereafter as the Escrow is in condition for Closing… However, if the Closing does not occur by the Expected Closing Date and said Date is not extended by mutual instructions of the Parties then the party not in default could notify Escrow and the others that unless Closing occurs within 5 business days following said notice, the Escrow shall be deemed terminated…
Finally, the escrow holder was instructed by the agreement to conduct the escrow in accordance with applicable law and customs and practice of the community in which Escrow Holder is located … .
As happens, things didn't work out exactly as planned. In October, Mesa sought a 30-day extension which, for the price of $20,000, was granted. Then, in November Mesa informed the seller that he was unable to complete the transaction. He proposed a joint development agreement instead. After discussions, a letter of agreement was prepared and signed by the seller, but not by the buyer.
Meanwhile, Mesa assigned the agreement to Marina Glencoe, L.P. The seller was aware of this and had discussions with Marina's general partner.
On December 16, the extended closing date, Marina had not deposited the down payment and Amidi had not submitted the documents necessary for closing. The escrow officer described the situation as a standoff. She also testified that under local escrow custom, the buyer deposits funds after the seller deposits the required documents.
The next day the seller gave instructions to cancel the escrow. Three days after that, on Dec. 20, Marina, the buyer, informed escrow that it was prepared to deposit the down payment once the seller put into escrow the grant deed and other papers necessary for the closing. The seller did not do so. Four months later the seller sold the property to AMA construction, a related entity, pursuant to an agreement made on December 17.
Marina filed a suit for specific performance. After its case had been presented, the seller moved for non-suit. The seller's motion was granted. The trial court had relied on an earlier appellate decision (Pittman v. Canahan, 1992) which had said, The failure of both parties to perform concurrent conditions during the time for performance results in a discharge of both parties' duty to perform.
Marina appealed, but guess what? The district in which this occurred was the same one as the court that had authored the opinion on which the trial court relied. Little surprise, then, that it upheld the trial court's ruling.
The position of the appellate court placed heavy emphasis on the time is of the essence clause. Expressed in plain English, the court's view seems to be this: If both parties haven't done what they were supposed to do by the time they were supposed to do it, then the obligations are gone. Either party can walk away.
Well, that is one way of looking at it; and many might be inclined to agree with such a straightforward approach. The trouble is, other district appellate courts have held different views, being somewhat more tolerant of performance that failed to meet a deadline. Moreover, both the contract and local custom allowed a certain amount of grace time after failure to meet a deadline.
Marina has filed a petition for review with the California Supreme Court. We may not have heard the last of this issue.