The Simple Has Become Complicated
In the old days, invariably I would get a call from a broker claiming to have a "simple" deal that would be easy to get done. Whether it was an all cash transaction between neighbors, a purchaser with superior banking connections or a sponsor deal in a completed building, at least in theory, getting to the finish line would be somewhat seamless. There are still a few transactions that fall into that category, but for the most part, each transaction is now a roller coaster ride, with enough twists and turns to require Dramamine.
In two recent situations, there were extended delays returning the fully-executed contracts. In one case, the sellers did not begin organizing their financing for the purchase of their new home until after the purchaser had signed the contract. As the purchaser reluctantly waited, it took a month for the contract to be returned. In another transaction, the seller's attorney went on holiday at Christmas time and did not return calls or emails for over two weeks. Again, the frustrated purchaser waited for the coveted fully-executed contract. Eventually it showed up, but the timing of completing the closing was delayed a month.
The Elusive Loan
Of course, one of the biggest bumps in the bumpy transaction, is clearing the loan for closing. Although the loan salesperson will opine relentlessly that both the purchaser and the co-op or condo have been "pre-approved," sooner or later, the Darth Vader of the loan process, the underwriter, starts waving the loan saber and things grind to a standstill. No matter how hard I try to convince my purchaser clients that there is a loan meat grinder through which all loans must be processed, folks just refuse to believe how difficult loan clearance can be, irrespective of the qualifications of the borrower.
It's All About Me
In this world of selfies, it is not surprising that getting a closing date that accommodates the needs of all of the attendees is astonishingly difficult. Considering the many players on the field, one would think that a closing date a few days later than expected would be understandable. Yet purchasers and sellers often freak over a slightly delayed closing. The attorneys and brokers, always the recipients of the complaints, just keep slogging until the big day is finally agreed upon. Sometimes, however, there are significant delays in getting to a closing date that border on breach of contract.
First a Word About Sponsor Closings
New construction sponsor transactions are in a separate category. The Offering Plan and sponsor Purchase Agreement, allow the sponsor to delay the closing endlessly, without a real remedy. Contracts may allow the purchaser to cancel if the closing does not take place a year or so after the estimated closing date, but that does not help the purchaser in any meaningful way. If a purchaser has time requirements for a closing, entering into a contract to purchase an apartment not yet completed, is not a great way to go.
Blood Pressure Rising
First, let's divide the troublesome closings into two categories: The first being those closings that are significantly delayed, but ultimately close; and the second, those closings that never occur due to refusal or inability of one of the parties to close. In the latter case, when the transaction blows up and the closing never occurs, the outcomes are easier to predict.
When the Seller Breaches
If it's the seller who refuses to close, the purchaser must either accept the return of the deposit or pursue an action for specific performance, by which the purchaser asks the court to order the seller to perform and transfer the property. In residential transactions, specific performance can be an effective, but expensive remedy. Ultimately, the purchaser will be successful, but at a significant cost and after many months of litigation. In many cases, the purchaser simply does not have the time or money to invest in a lawsuit, so accepting a return of the deposit and moving on is the rational thing to do. Since almost all residential real estate contracts limit the purchaser's remedy to return of the contract deposit, if the seller is unable or refuses to close, even if the seller willfully defaults, litigating for additional damages suffered by the purchaser is almost always a waste of time and money.
When the Purchaser Breaches
And then there's the defaulting purchaser. There are those times when the purchaser's financing evaporates or the purchaser just decides not to go forward. When that happens, the seller will have to decide whether "contract deposit litigation" is cost effective. One of the great misconceptions about a defaulting purchaser is that the seller can automatically keep the deposit once the purchaser is unable to close. Except in those rare situations where the closing date is "time is of the essence," and the purchaser fails or refuses to close, even if the purchaser willfully defaults, the seller will be subject to the escrow provisions of the contract of sale. Those provisions will require the seller to demand the release of the contract deposit. Once that demand is made and the purchaser notifies the escrowee (almost always the seller's attorney), not to release the deposit, the parties are at a stalemate until a settlement is reached or until one of the parties commences an action to determine which party is entitled to the deposit. Since the cost of contract deposit litigation can be the equivalent of throwing cash out a window, unless there is a very large deposit, the parties usually determine that settlement is best. But not always. Sometimes emotions run so high when a purchaser walks away, that more good money gets thrown after bad and litigation ensues. That being said, since a seller can't obtain the deposit without working out a settlement with the purchaser, if the purchaser refuses to cooperate, the seller may have no choice but to commence a lawsuit. It's not pretty. At the end of the day, once the seller is forced to commence a lawsuit to obtain the deposit, the full deposit paid by the purchaser will never be obtained by the seller, as the cost of the litigation will offset even a complete recovery of the deposit.
What About the Reluctant Closer?
When a party ultimately intends to close, but delays the closing for an unreasonable period of time, the options are quite limited. In one typical situation, the purchaser will drag his or her feet submitting the Board package. This maneuver can easily delay the closing date by a number of weeks. Slowing down the completion of the loan clearance process is another tool that the remorseful purchaser will use to delay the inevitable. Finally, the purchaser will use all means available to delay agreement on a closing date. After all the ups and downs of a typical closing, when the purchaser plays games over the closing date, the seller is driven to the brink. Particularly if the seller is in the midst of a purchase transaction that is dependent upon the sale of his or her current residence, there can be a cascading pile up of woe waiting for the purchaser to commit to a closing date. At a minimum, the seller is faced with additional carrying costs. Similarly, the seller can be just as frustrating, if the seller has not found a place to live, has a planned vacation, is waiting for the school year to end or just isn't ready to pack up and leave. When the seller delays, the purchaser's schedule can be thrown out of kilter, and worse, he or she may lose a locked in interest rate.
Truth be Told...
The truth of the matter is that the residential contract of sale is not really set up to accommodate delays and defaults. Yes, there are many provisions that address a possible breach by one party or the other, and there are cancellation rights under certain circumstances, but at the end of the day, after the screaming, shouting and tears, the parties find themselves at the closing table and the transaction is ultimately completed. In an extremely rare situation, one party might reimburse the other party's costs for the delay, be it additional maintenance and loan expenses for the seller, or loan commitment extension fees for the purchaser. In most cases, however, the delaying party will not reimburse costs incurred for the delay and there is nothing in the contract of sale that requires such reimbursement. Although an attorney might attempt to add a rider provision when the contract is being negotiated that addresses delay by the other party, the other side will not agree to the additional language and the contract will remain silent on unreasonable delays.
The Time Is of the Essence Letter
The delaying party might receive a letter from the other side designating a date for closing as "time is of the essence" and actually schedule the closing with the other participants. Unless the letter is the first step in commencing litigation, followed by an adjourned closing where the delaying party is absent, the unilateral time is of the essence letter just ratchets up the emotions and has little impact on getting the deal done.
Residential Reality: A Time to Chill
Unless a transaction is doomed to failure, the parties must accept that delays in residential transactions have become commonplace. The best protection against unwarranted delays is to express the need for a range of closing dates at the beginning of the negotiating process and confirm that a closing can and will take place during the requested period (assuming cooperation by the purchaser's bank and the managing agent). If there are blackout periods, including extended travel plans or work obligations, those periods when a closing will not be possible should be disclosed up front. Do not rely on the so-called right to adjourn the closing date for 30 days, as it will wreak havoc on the other side. Remember, almost all closing dates are "on or about dates," meaning that the closing will take place within a reasonable period after the contract date. If you are unable to close on or about the suggested closing date, don't keep it a secret. As long as the parties work together and use best efforts to satisfy contract obligations, things will go as smoothly as can be expected. As they say, do unto others...