With home prices declining, do homebuyers cancel escrows more frequently?

  • Yes, transactions are canceled more often (67%, 16 Votes)
  • No, transactions are not canceled more often (33%, 8 Votes)

Total Voters: 24

This article establishes when a buyer or seller may exercise their enforceable right to cancel the purchase agreement and terminate the transaction.

The litigious time-essence provision

The seemingly harmless time-is-of-the-essence provision stands stark amongst the boilerplate provisions of purchase agreement forms purchased by some California publishers, such as the California Association of Realtors (CAR).

By its plain words, the time-essence provision gives notice to the buyer and seller that their compliance by the date set in other provisions in the purchase agreement which call for an event to occur or an activity to be performed is essential to the continuation of the transaction. Compliance deadline examples range from dates for opening and closing escrow to eliminating contingencies.

Thus, the apparent bargain built into the purchase agreement by the presence of the time-essence provision gives the buyer or seller the right to immediately cancel the transaction on:

  • the failure of an event to occur; or
  • the failure of the other party to perform an activity, usually by an approval or waiver of a condition, commonly called a contingency, by the appointed deadline date.

Time-essence provisions handicap transactions

By virtue of the number of tasks a buyer undertakes to close a transaction — contrasted with the very few tasks imposed on a seller — the time-essence clause “stacks the odds” against the buyer to acquire a property. This risk exists even though the buyer and all third parties involved on their behalf may have acted with diligence at all times.

More critically, a particular event or activity while necessary may not be such a key — material — factor that the transaction has lost it purpose and cannot proceed to closing due to a foreseeable but unanticipated delay in its occurrence or performance.

Further, for a vast majority of agents who work diligently to clear conditions and close a transaction, the time-essence clause places an unreasonable and unnecessary risk of cancellation on a transaction. Foreseeable delays in closing a transaction exist in all real estate sales.  Standing alone, the time-essence provisions is not flexible, the antithesis of a real estate transaction during the closing process.

Further, unforeseeable delays are also possible, as made abundantly clear at the outset of the COVID-19 pandemic when quarantine rules made a timely closing suddenly more difficult, or impossible. Black swans do surface and do affect commerce.

Worse yet for brokers and their agents, the time-essence clause has, over the years, consistently demonstrated an ability to produce litigation over rights to money or ownership which have been lost or forfeited by a cancellation — typically initiated by the seller.

Editor’s note — RPI purchase agreement forms do not contain a time-essence clause as a matter of best practice. In contrast, RPI purchase agreements authorize agents to extend performance dates by up to one month, destroying any claim the scheduled date for performance is so invariable that the purpose for contracting no longer exists and thus cancellation is the appropriate remedy. [See RPI Form 150 §10.2]

This is the second episode in our series covering purchase agreement types and variations. The prior episode defines the different types of purchase agreements, and illustrates a broker’s freedom to use any purchase agreement contract they choose.

Purpose of the time-essence provision

The arguable purpose for including a time-essence clause in a purchase agreement is to protect the seller from delays in the buyer’s payment of the sales price. Delays “tie up” both the seller’s ownership of the real estate and receipt of the net sales proceeds beyond the date or period fixed for the transfer of ownership.

Another less logical theory is the purported inability of courts to estimate the compensation owed a seller for losses resulting from a delay in the close of escrow due to the buyer’s failure to perform by the date agreed.

However, delays in closing of a few days — or even a few weeks or more — rarely cause any compensable loss of money, property value, rights or property for the person attempting to cancel based on the passing of a performance deadline. The issue: where is the loss of money?

Typically, the cancellation by a seller is motivated not by time, but by greater profits to be had elsewhere. This seller interference is most common during periods of recovery with increasing buyer demand, and thus rising prices, as jobs and incomes increase. In contrast, during a recession, it is the buyer pulling the time-essence trigger to avoid paying the agreed price which exceeds its fast-declining market value by the time for closing.

Even when a money loss is incurred due to a delay in performance, the loss is usually sustained by the seller and is easily calculable. Seller losses typically consist of lost rental income due to vacancies or the carrying costs of negative cash-flow for the period beyond the appointed closing date to the actual date of closing.

An infrequent exception arises when a seller has a pre-existing obligation to fund an unrelated transaction and the seller enters into a purchase agreement to sell property in reliance on closing the sale to obtain funds to meet their obligations in the pre-existing transaction.

A buyer’s money losses on a seller’s default usually arise out of:

  • a missed closing deadline needed to receive tax benefits; or
  • a locked-in interest rate on a mortgage now available only at a higher rate or not at all.

Related article:

Termination of rights

An effective Notice of Cancellation interferes with the completion of a sales transaction as initially envisioned by the buyer and seller at the time they entered into the purchase agreement and escrow instructions.

On a proper cancellation for cause, the person terminating the purchase agreement transaction does not need to further perform any activity called for, including the close of escrow. Consequentially, the transaction has been terminated and the obligations of both the buyer and seller to further perform no longer exist. [See RPI Form 183]

For example, the person who properly cancels a purchase agreement has the unfettered right:

  • in the case of a seller, to retain ownership or resell the property to other buyers at a higher price; and
  • in the case of a buyer, to keep their funds or use them to purchase other property on more favorable terms.

These rights to act, free of purchase agreement and escrow obligations, are the very objectives met by cancelling the purchase and escrow agreements. The alternative to cancelling the tandem agreements is an attempt to keep the transaction together by determining the additional time reasonably needed by the other person to perform as originally contemplated, then granting an extension of time in which to do so.

When this “grace period” of additional time is granted, and then expires without compliance, a cancellation for failure to perform is understandable by all involved, and enforceable. [Fowler v. Ross (1983) 142 CA3d 472]

For more information, see our forthcoming article on all aspects of extending the purchase agreement. Subscribe to firsttuesday’s newsletter, Quilix.

Cancellation forfeits rights

An effective cancellation by one person forfeits the rights held by the other to close the transaction and receive the benefits bargained for on entering into the purchase agreement, which is, well, the essence of contracting.

Further, on an effective cancellation, all persons involved rendering services are adversely affected by the cancellation’s ripple effects since they all lose the time and effort they invested to get the transaction closed, including:

  • the agents;
  • escrow;
  • lender; and
  • title company.

For example, when a seller cancels, the buyer by forfeiture, loses their contract right to become the owner of the property. Conversely, when the buyer cancels, the seller loses the right to receive funds and be relieved of the obligations of ownership.

Thus, a cancellation by either the buyer or seller, when proper and enforceable, is the final moment in the life of a purchase agreement and escrow. A justifiable cancellation spells the end to all expectations held by everyone directly or indirectly affiliated with the sale. Not so when the cancellation is unreasonable and thus unenforceable and others lose money, like lost brokerage fees and rights to money or property for principals involved.

Cancellation factors

For a seller to successfully cancel an escrow based on the failure of an event to occur or a condition — contingency — to be met, the purchase agreement or escrow instructions needs to contain:

  • a clear description of the event which is to occur or the condition to be eliminated;
  • an appointed date or expiration of a time period by which the event or activity described is to occur; and
  • a written provision stating in clear and unmistakable wording, understandable to the buyer, that the seller has the right to cancel the transaction as the consequence of a failure of the event or the activity to be performed by the appointed date.

When provisions in the purchase agreement or escrow instructions meet all the above criteria, the seller may cancel when:

  • the seller has performed all acts which are required, by agreement or necessity, to precede the event or activity triggering the right to cancel (in plain words, the seller cannot be in default on their performance);
  • the event or activity fails to occur by the appointed date; and
  • the seller performs or stands ready, willing and able to perform all other acts necessary on the part of the seller to close the transaction.

Related article:

Consequences of nonperformance

The very existence of the time-essence provision puts the buyer on notice, advising them their performance of the event or activity which is to occur or be brought about by the date scheduled is critical to the continuation of the purchase agreement and escrow instructions. Thus, the time-essence provision sets the buyer’s reasonable expectations of the consequences of their failure to perform, i.e., the risk that the seller may cancel the transaction and the buyer’s right to buy the property will be forfeited.

However, the consequences of the failure of the buyer to perform or for an activity or event to occur depend upon the type of time-related provision contained in the purchase agreement and escrow instructions. The different provisions related to performance dates include:

  • a time-essence provision, which gives the seller the right to cancel when the event or activity called for does not occur by an appointed date;
  • a seller-may-cancel contingency provision, which itself authorizes the seller to cancel when the condition or event does not occur, whether or not a time-essence clause exists;
  • an authorization-to-extend provision, which grants the agents the power to extend performance dates up to 30 days (or other wording indicating an accommodation for delays), whether or not a time-essence clause or a seller-may-cancel clause exists [See RPI Form 15010.2]; and
  • an extension of time granted by the seller, typically in supplemental escrow instructions, with wording imposing strict adherence to the new performance deadlines and authorizing the seller to cancel on expiration of the extension if the event or activity is not forthcoming.

Elements of a default

Before either a buyer or seller may effectively cancel a transaction, they are required to place the other person in default. For example, for a seller to exercise the right to cancel, they cannot themselves be in default on the date scheduled for the buyer’s performance or the event to occur.

For the buyer or seller to place the other in default, three transactional facts need to exist:

  • a date crucial to the continuation of the transaction needs to have passed;
  • the condition called for in the purchase agreement did not occur by the scheduled date; and
  • the person cancelling has fully performed all activities required in order for the other person to perform by the scheduled date, called a condition precedent, as well as having performed or be ready, willing and able to perform at the time of cancellation, all activities they were obligated to perform in order to close escrow, called a condition concurrent.

Was the cancellation timely?

The setting of a time for an activity or event to occur does not, by itself, automatically allow a purchase agreement transaction to be terminated by one person when the appointed date has passed and the event has not occurred or other person has not yet performed.

To permit a cancellation immediately following the expiration of the appointed time for occurrence or performance, the purchase agreement or escrow instructions needs to clearly state it is the intention of both parties that the failure by one or the other person to perform by the appointed day is to subject their contract rights to forfeiture.

Thus, clear cut wording throughout the purchase and escrow documents needs to consistently manifest an intent to make time for performance crucial to the continued existence of the transaction. If not, the appointed date has insufficient significance to justify instant cancellation.

For example, sometimes the only wording regarding any right to cancel a transaction appears in the escrow instructions. Escrow is generally instructed to close at any time after the date scheduled for closing if escrow is in a position to do so, provided escrow has not yet received instructions to cancel escrow and return documents and funds.

This wording is consistent with all types of purchase agreement provisions.

Related article:

Closing as a target date

In the prior example, consider that neither the purchase agreement nor the escrow instructions contain a clause stating “time is of the essence in this agreement.”

Further, no clear, unequivocal or unmistakable wording in any contingency provision shows an intent on the part of the buyer and seller to make time of the essence, such as wording giving the seller or buyer the “right to cancel” on the failure of either the other person to perform a described activity or for an event to occur by a scheduled date.

Under these examples, which lack time-essence provisions, the time appointed for the delivery of such items as funds for closing or clearance of encumbrances from title is merely a “target date,” preliminary to establishing the right to cancel within a “grace period” to be negotiated for performance.

Default needed to justify cancellation

Before a buyer or seller may consider cancelling a transaction, the other person needs to have defaulted on their completion of an activity or an event has failed to occur.

For example, a seller cancels a 30-day escrow the day after the date it is scheduled to close. The purchase agreement granted the agents authorization to extend performance dates, including the date for closing, up to 30 days.

33 days later, for a total of 63 days from the date of acceptance, the buyer, using diligence in the pursuit of a loan, obtains final loan approval and has all the funds needed to close escrow. The agents did not exercise their authority to extend performance dates, which is typically the case.

Is the seller’s cancellation effective without first giving an extension of additional time for closing when the buyer has not performed by the date scheduled for the close of escrow?

No! The buyer is not yet in default. Sixty-three days is a reasonable period of time for the buyer to obtain the purchase-assist mortgage funds agreed to in the purchase agreement. Most instructive for buyers and agents, time for closing was not made crucial to the continuation of the agreement by a written provision.

Thus, a reasonable period of time has to pass before the buyer is in default. Only when the buyer is in default on expiration of a reasonable time extension may the seller exercise their right to cancel.

Reasonable period to open escrow

Now consider an agent who prepares a purchase agreement and fails to set a fixed time period for the opening of escrow. However, the purchase agreement does state an appointed date for closing escrow as 60 days from the date the purchase agreement was entered into.

The buyer fails to sign and return escrow instructions to open escrow. The seller cancels the transaction 12 days after the date escrow was scheduled to close.

Was the buyer in default at the time of cancellation?

Yes! The buyer was in default for their failure to timely sign and return escrow instructions. The buyer had an obligation to open escrow within an unstated period of time. Since the time for opening escrow was not agreed to, a reasonable period of time for opening escrow is allowed.

A reasonable period for opening escrow is a date sufficiently in advance of the date set for the close of escrow to give escrow enough time to perform its tasks by the date scheduled for closing. The cancellation 12 days after the closing date was effective to terminate the transaction. A reasonable period for the buyer to open escrow ended well before the scheduled closing date.

The buyer, having failed to open escrow before the closing date, was in default on the closing date. Thus, the buyer lost their right to buy the property since they did not cure the default by opening escrow before the date set for closing and the seller’s cancellation. [Consolidated World Investments, Inc. v. Lido Preferred Ltd. (1992) 9 CA4th 373]

However, a one-day delay by a buyer before signing and delivering instructions to open escrow does not allow a seller to cancel the transaction and avoid closing escrow. Reasonably, a one-day delay in opening escrow is not a default at all, even when time is unequivocally declared to be of the essence in the purchase agreement.

To cancel, you need to first perform

Consider a seller who wants to cancel a transaction since the buyer is in default under the purchase agreement or escrow instructions. Before the seller may cancel, the seller is required to:

  • perform all acts and cause all events to occur which, by agreement or necessity, are the seller’s obligation and need to occur before the buyer becomes obligated to perform, called conditions precedent, such as delivering disclosures, reports, etc., or completing repairs requiring the buyer’s approval;
  • fully perform all activities and obligations imposed on the seller which are to occur at the same time as the buyer’s performance, without concern for whether the buyer has performed, called conditions concurrent, such as handing escrow a grant deed and all other information and items required of the seller for escrow to clear title and close; and
  • perform or demonstrate they are able to perform all other activities or bring about events which are the obligation of the seller for closing the transaction, whether or not the buyer ever performs, called conditions subsequent, such as meeting any requirements of the buyer’s lender for repairs or clearances.

Thus, while the buyer may have failed to perform by the time agreed, the seller may not cancel until the seller has performed or stands ready, willing and able to perform under the above three conditions (precedent, concurrent and subsequent), conditions which exist in most purchase agreements and escrow instructions.