(This post is authored by Craig Blackmon, an attorney and real estate broker in Seattle whose practice focuses on residential real estate — see his web page or his blog for more information. Please note that this post is not legal advice. You should consult an attorney for specific legal counsel.)
Your purchase or sale is scheduled to close on the Closing Date. What happens if, for some reason (perhaps a delay with the lender), the transaction does not close on the Closing Date? What are the rights and obligations of the buyer and the seller?
A discussion of this scenario begins with the “time is of the essence” clause. Virtually all purchase and sale agreements (including the forms used by the MLS), contain a clause indicating that time is of the essence. When a contract does not contain such a clause, the law affords the parties some flexibility in regards to performance of their contractual obligations. With such a clause, however, the law requires the parties to perform as indicated by the contract. Thus, assuming the contract indicates that time is of the essence, the transaction must close on the closing date or there will be problems.
If the transaction fails to close because a contingency was not satisfied, such as a financing contingency, then both parties are absolved of their contractual obligations. A contingency is a “condition precedent” — i.e. a condition that must be satisfied before the contract binds the parties. So, if the contract includes a financing contingency, and the transaction fails to close because the buyer did not get financing in time, then neither party is in breach of the contract. The contract simply expires. If the parties want to proceed with the transaction and close beyond the closing date, they need to so agree in writing by amending the contract prior to its expiration.
If the transaction fails to close because one of the parties did not live up to their obligations, however, then the other party may have an action for breach of contract. For example, suppose the seller fails to execute the documents necessary to convey good title to buyer. If, at the time of closing, buyer has performed its obligations, then buyer has a breach of contract claim against the seller. Note, however, that the buyer must have tendered performance — i.e. deposited the funds with escrow to purchase the property — in order to have a breach of contract claim (with two exceptions noted below). If neither party has performed its obligations by the closing date, the contract expires.
If buyer did not tender performance, buyer may still have a claim if seller either waived the “time is of the essence” clause, or otherwise acted in a manner inconsistent with an expectation of performance on the closing date and the seller relied on that action in not performing (the legal term is “collateral estoppel”). In either case, the law concludes that the buyer has a claim because the seller has acted in a manner inconsistent with enforcement of the closing date.