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Hurry Up! Time is of the essence.

We’ve all signed contracts where certain things had to happen by certain dates. Or did they? What happens when your agreement doesn’t have a “time is of the essence” clause?

In one case the parties signed a real estate agreement that made payment of the purchase price subject to the property being rezoned. Sounds crazy, right? But the final purchase price was calculated based on the number of houses that could be built. Buyer was responsible for the rezoning. Two years later, the property hadn’t been rezoned, but it’s value had drastically increased. Seller wanted to be paid for his property, or to be freed from the contract. The settlement date in the contract came, was extended and went multiple times. Yet, Seller hadn’t been paid. Seller sued for breach of the contract. Buyer argued that it didn’t have to pay yet because the rezoning hadn’t been completed.

The parties went to court. Generally, the law imposes a “reasonable time” for each party to fulfill their obligations under a contract unless there is a time is of the essence clause or the parties treated the dates in the contract as firm, fixed dates. In terms of the Dr. Who television show, a time is of the essence clause means that the date is a fixed moment in time and cannot be changed. This contract didn’t have a time is of the essence provision. The Court found that because time wasn’t “of the essence,” it had to look at whether the Buyer’s performance (or lack thereof) was “reasonable.” Given the complexity of the re-zoning process at the time, the Court found that the Buyer’s actions were reasonable, and the Buyer could force the Seller to complete the transaction at the lower price point.

Had time been “of the essence,” the Buyer would have been in breach of contract and the Seller free to look for another purchaser. This one phrase can change the meaning of a contract.

A lot.

When time is of the essence the person who owes performance under the contract must act within in a specific time period or before a set date before the other side can perform its obligations. If the person fails to act within the required time, then she has breached the contract. In the real estate contract above, Buyer’s obligation to pay for the property by a certain date was subject to its ability to get the property re-zoned. The important date wasn’t the arbitrary settlement date written into the contract but the date the Buyer obtained the rezoning. Buyer had a “reasonable” period of time to get the property rezoned and then a “reasonable” time after the rezoning to pay for the property.

Seller made several critical mistakes. Seller wasn’t represented by an attorney in creating the contract. Seller wasn’t in the business of selling property. Buyer was a seasoned builder and real estate investor. As a result, Seller didn’t know how to protect himself and didn’t know he needed a “time is of the essence” clause or that it was “standard” for this type of agreement. Buyer, however, knew he was giving himself lots of wiggle room by not including this standard contract clause in their agreement. At the end of the day, the Seller waited years … literally years… .before he was paid for his property.

Does this mean you can ignore dates set out in a contract?  Ah, no. Most contracts are going to have time is of the essence provisions. Those that don’t will have default provisions that state that not making payment, delivering the goods or taking actions by specific dates will be a breach of the contract. But sometimes not specifying that “time is of the essence” may result in unexpected and negative results. Know when time is of the essence and how it can help or hurt you in your contracts.

Worried that a paperwork mistake might undermine the protections for your business? I created a program specially designed to help with these compliance issues called the Corporate Shield™, a done-with-you solution. Go to http://www.attorneynancygreene.com/corporate-shield/  RIGHT NOW to find out more about the Corporate Shield™, and what it can do for your business.

If you still have questions, please contact me at Land, Carroll and Blair, PC, in Alexandria and Fairfax, VA at:

(703) 836-1000

ngreene@landcarroll.com

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DISCLAIMER:

You knew one was coming, right? After all, I am an attorney. Nothing in this article is or should be considered legal advice. This article is for information purposes only. This article forms no lawyer-client relationship. Consult an attorney about your situation. WE SPECIFICALLY DISCLAIM ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY REPRESENTATIONS OR WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. We do not give tax or investment advice or advocate the purchase or sale of any security or investment. Always seek the assistance of a professional for tax, legal and investment advice.

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