Buyer defaults on a time is of the essence contract.
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Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
6yOriginally posted by @Roger R.:
I was scheduled to close on the sale of my NYC property on March 31st. One day before the close date the buyer called me up and said he wouldn't be closing. He gave invalid reasons why he couldn't close (Title companies weren't working, a lawyer not associated with the sale got corona, city registrar was closed). We have a time is of the essence clause in our contract, but with the courts being closed, I can't enforce. I had my lawyer write a letter to the other side to say they are in default. I'm holding a decent size down payment. Any ideas how this will play out.
Given the current circumstances you need to be reasonable but also follow the contract. The best thing for all parties is to close. You need to determine if they are still wanting to move forward or if they are trying to back out. Sending a demand letter is a good move as that usually gives them a few days to close or all bets are off. Depending on the language in the contract and who is holding the deposit you may have a legal battle on your hands if they want to try and get the deposit back. They can file a claim and the deposit will remain in escrow account until you settle. Right or wrong it will cost you to defend so it's best to try to get the deal closed if they are game.
8 Replies
- 6yHadar OrkibiPro MemberRental Property Investor · USA / NZ · Member since 2016 · 1k+ posts · 812 votes
@Roger R. what is stipulated in the contract in regard to the down payment?
And as background info, why did you put "time is of the essence"?
- Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes6y
Originally posted by @Hadar Orkibi:
@Roger R. what is stipulated in the contract in regard to the down payment?
And as background info, why did you put "time is of the essence"?
You always want time is of the essence as a seller as that triggers a drop dead date in the event of default. No ambiguity on when it was supposed to close.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes6y
Your contract will stipulate what happens in regards to a buyer default.
District Invest Group545 Reviews - Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes6y
Originally posted by @Roger R.:
I was scheduled to close on the sale of my NYC property on March 31st. One day before the close date the buyer called me up and said he wouldn't be closing. He gave invalid reasons why he couldn't close (Title companies weren't working, a lawyer not associated with the sale got corona, city registrar was closed). We have a time is of the essence clause in our contract, but with the courts being closed, I can't enforce. I had my lawyer write a letter to the other side to say they are in default. I'm holding a decent size down payment. Any ideas how this will play out.
Given the current circumstances you need to be reasonable but also follow the contract. The best thing for all parties is to close. You need to determine if they are still wanting to move forward or if they are trying to back out. Sending a demand letter is a good move as that usually gives them a few days to close or all bets are off. Depending on the language in the contract and who is holding the deposit you may have a legal battle on your hands if they want to try and get the deposit back. They can file a claim and the deposit will remain in escrow account until you settle. Right or wrong it will cost you to defend so it's best to try to get the deal closed if they are game.
- 6yHadar OrkibiPro MemberRental Property Investor · USA / NZ · Member since 2016 · 1k+ posts · 812 votes
Thanks @Greg Dickerson. My question was pointed to see how Rely important is the time to @Roger R.?
IF it is and he can take the down payment legally and move on then that maybe the right thing to do.
OR if its not, then maybe waiting to the current buyer is better idea.
"Bird in the hand" kind of situation....
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes6y
@Roger R. We’re you able to provide/obtain you were required to provide....any title searches/insurance, etc? Is the title company/closing the buyer’s responsibility?
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes6y
@Roger R., how will it play out is anyone's guess? As mentioned, I think the typical scenario is you either delay closing and still get deal done (typically the cleanest option). In single family deals, it is typically left at deposit remains with seller, and you are forced to relist, but deposits are typically $1-3k in my area.
We cannot know what the seller's true motivations are, and how much their deposit is worth to them. As mentioned, you could have a law suit and counter suits on your hands, at which point both parties will be trying to figure out how much you will each recover versus how much it will cost you.
It is a terrible feeling to settle a suit you know you could win just because it will cost you LESS than continuing to fight, but sometimes it is worth it to just be over it and move on, if it gets to this point of course.
- Investor · Ormond Beach, FL · Member since 2019 · 78 posts · 73 votes6y
@Greg Dickerson provides the best advice above. I am not an attorney, so I am sure the following story will not utilize the proper legal language for the actions/events that occurred.
We were on the buy-side of a deal and decided to exercise our contractual right to pull out (our notice was delivered during the DD period). We followed all contractual procedures to a "T". The Seller refused to release our EMD. Following all the "rules", we sent letters, notices, etc. requesting immediate release of our EMD. These actions produced no results. The Seller still refused to release EMD. We had to file suit. This was in Nov. 2018.
Seller used all kinds of tactics to avoid being served the lawsuit. He changed lawyers, stayed away from known addresses, etc. Ultimately, we were finally able to demonstrate to a judge that Seller was actively avoiding service. The judge allowed us to serve the latest attorney on file and to also "serve" via public publication (newspaper notice). Once the attorney was served, the EMD was returned. This was 96 days later in Mar. 2019.
At this point, we were in pretty deep on attorney’s fees (+/- $15K) and decided to continue with the lawsuit to recapture said fees. It is April 15, 2020, and the lawsuit still has not been decided. We were supposed to have received a judgement on April 2, 2020, but of course the courts are closed because of CV-19. Judgement was postponed until June 2020.
Fortunately, the Seller's tactics and his attorneys' behavior (all three of them) pissed off our attorney and he decided to move forward on contingency after we racked up the +/- $15K. We are fairly confident we will prevail in the lawsuit. The Seller's counter-claim was that 96 days was a reasonable time frame to have returned the EMD and that the contract did not specify when the EMD had to be returned. They ignored the "time is of the essence" clause.
There are couple lessons here.
First, I would advise that all purchase sale agreements have the word “immediate” preceding any language that discusses the return of the EMD. The "time is of the essence" is fairly straightforward and seemed sufficient, but if the word immediate precedes the direction to return the EMD, you remove all questions about what is a "reasonable" time frame for its return.
Second, Buyer DD should not only include all that is pertinent about the property, but should also cover the Seller themselves. There was a very good reason we backed out of this deal.
The property in question was a 9-unit industrial warehouse. We requested all the standard documentation and then some. While we received the leases, we were only provided limited financials, and no records of tenant payment histories.
OK, so maybe they just didn’t keep good records? This was a great building in a fantastic location, the lease terms were LL favorable, and the tenant base seemed strong. We still wanted to proceed. But before we did, I requested interviews with all tenants as a last-ditch effort to fill in some of the gaps. The Seller denied our request and warned us to stay away from the tenants until we owned the property.
While there had been a small red flag in the back of my mind because of the weak documentation, I became outright suspicious at Seller’s reaction to our request for tenant interviews. So I began researching the Seller. It was a Family Trust, so it took some digging but I eventually found some background on the Trustee.
Turns out, this Trustee had recently been released from an 8-year stint in prison for insurance fraud. He had owned-operated a disaster restoration company. This company would receive people’s insurance claim funds and then not complete the work. It was a massive ring of fraud. Thankfully, this person was caught, tried, and sentenced.
While finding out what we did about the Seller was enough for us to pull out, guess what type of business comprised the building’s largest tenant? That’s right, a disaster restoration company. We pulled out that day. We were not dealing with a good person. And boy was I glad I researched the Seller on top of everything else. I can only imagine the mess had we moved forward.
Finally, I will note that we have followed the sale status of building with an elevated level of interest. A lien will likely be our only way of collecting. To-date, the building is still for sale (I imagine other would-be Buyers are finding out what we did). The brokerage company has changed several times during our monitoring of the asset. In each instance, I have forwarded all the publicly published articles I uncovered on the Trustee. I want them to be aware of the type of person they are representing. Not one broker has reached back out to me with questions or comments.
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