#1 Misunderstood Real Estate Contract Provision Explained

Jon Mand


Greg: Welcome to this edition of the Louisville Luxury Home podcast series, brought to you by Jon Mand with Lenihan Sotheby’s International Realty. Jon, good to see you this morning. How are you?

Jon: Doing great, Greg. Good to see you.

Greg: Thank you. Walking around the office talking to other agents I frequently hear people talking about “time is of the essence”, and it seems to me that’s a little confusing for someone who’s not in the industry and even for a lot of people who are in the industry. I’m hoping you can clear that statement up for me a little bit.

Jon: I absolutely know it causes quite a bit of confusion. Sometimes it’s maybe even counter-intuitive to the buying and selling public and certainly causes confusion, even with a lot of real estate professionals, not within our office, but you wouldn’t believe some of the encounters I’ve had with agents from some other brokerages.

Greg: “Time is of the essence” is a literal phrase, it’s in the contract that we use in Louisville, and it only appears once or twice, it’s not on every page.

Jon: That’s correct, yes. It is a legal term, you have to have all the words here, “time is of the essence”, in the contract. Sometimes people will try to come up with new phraseology to the same effect, but that is a legal concept, you want to make sure it’s phrased exactly that way, and it’s an interesting concept. In general contract law, most contracts are understood to have time of the essence which simply means that the dates and times in the contract matter, that those are hard deadlines contained in that contract. You can understand when you think about general commerce and perishable goods, if you’re ordering a truck full of grapefruit and it has to be here by this Friday, if the driver doesn’t show up until next Friday with it, you don’t have to pay for it. Your contract was for this Friday because you’ve got a perishable item there and so the dates do matter. In general contract law that’s the underlying principle that time is of the essence.

Real estate is a little bit different because we have a durable good. The house, if you said, “I’m going to close on the house this Friday,” and we actually closed on it next Friday, there’s probably not a lot that has changed with that property in seven days. It’s been there for 50 years or so, what’s another week? It’s a little bit different concept. Every locality, every board of realtors, has their own take on it or their own preference for it. We use the forms that are prepared by the Greater Louisville Association of Realtors and what we’ll be talking about today is based on how they treat this concept within our Louisville market.

Greg: In general, when someone has time is of the essence in their real estate contract it is not for the entire contract. Like you said, the house is going to be the house today, tomorrow, the next day. Instead time is of the essence is for …

Jon: It depends on the board even within Kentucky. If you go to some of the other markets around Kentucky, for instance, I know the Bowling Green contract had time is of the essence for everything within the contract. Where our Louisville board has its own little peculiarity is that time is not of the essence for the entire contract but specifically one section of the contract that deals with home inspections. Now, an agent representing a buyer that understands the difference between the two can simply write in “time is of the essence” and make the entire contract the same as a Bowling Green contract or maybe an Arizona contract or whatever other market may use that, but again that would require the agent understanding the concept and making sure that doing so is going to be to the benefit of their client, whether it’s the buyer or seller in a particular transaction.

Greg: Then that would lock you in, right? If you said, “Time is of the essence for the entire contract and we must close by January 1,” and something happens and you can’t get to the closing table until January 3, it’s off, right?

Jon: Yeah, exactly. That’s where often times where we run into problems or misunderstandings with clients is exactly that scenario where a contract says, “We’re going to close on November 1,” and the closing November 1 comes and the lender’s not ready or the underwriting is not done or there’s some delay that causes it to slip a few days.

The seller’s immediate response often times is, “They have to close, November 1 is here, I’m going to sell the home to another buyer, I’m going to do any number of things because they haven’t closed and it says November 1 on the paper.” That’s always an interesting conversation when we have to call them and say, “I know it says November 1, but time is not of the essence with regards to the closing date,” which means that they have a reasonable period of time beyond that date to consummate the transaction or release the contingency or whatever it is that we’re dealing with in that particular circumstance.

Now the next question is obviously, what’s reasonable?

Greg: My reasonable might be different than your reasonable.

Jon: Unfortunately we don’t get to decide as brokers or the buyer or the seller what’s reasonable and what’s not reasonable. Ultimately that decision is going to come down to an arbitrator or judge or somebody that’s going to make that call in the event that there was a dispute over the transaction. I would say that reasonableness is going to vary depending on the other terms of the contract.

For instance, if you made a cash offer to close in seven days, would it be reasonable to extend the closing date by another seven days? If you had a closing that was supposed to occur in 90 days and you were looking for a seven day extension to close it, that seems more reasonable to me than a seven day extension on a seven day close. There’s going to be a lot of factors that go into it. Then what’s the cause of the delay? Whose fault was it? Why aren’t we ready to perform per the terms of the contract? It’s interesting, the closing date does not have that provision, “time is of the essence”, in our standard contract for the Greater Louisville Association of Realtors and that’s something that certainly causes some confusion for buyers, for sellers and for a lot of agents, frankly.

One area that we do have it, time of the essence, in our contract is the inspection period, which is a hugely important section of our contract related to the buyer’s due diligence time frame on a property.

Greg: That’s why the board chose to make this paragraph apply, “time is of the essence”, because it is so important. It is important to the seller not to get strung out with a buyer who takes three months or something to do an inspection.

Jon: Exactly. The trade off in Louisville has been we have an inspection clause that is pretty buyer friendly. As long as they’ve hired a home inspector they have a pretty wide exit path from a transaction without even having to cite particular reasons based on the language in our board contract. That is not the case in all markets. If you jump across the bridge to southern Indiana, very different inspection language in their contracts. In Louisville we’ve got a pretty buyer friendly inspection language. The trade off is we’ve got a pretty tight time frame, typically.

It, in our market, averages 7 to maybe 14 days for a buyer to perform their inspections and time is of the essence. That means that the seller enters into a contract with a buyer, the buyer has a pretty easy way to terminate that contract unilaterally in those first week or two. The trade off is the seller knows it’s only going to be a week or two and then once that deadline hits they know if they’ve got a deal or not. If the buyer makes a repair request or if the buyer says, “We’ll go ahead and take the property as-is.” Within that first inspection period the seller is going to have a much higher level of certainty as to whether or not the buyer is going to perform and move forward.

Greg: Have you seen this play out in the marketplace? Let’s say we’re working with a 10-day inspection period, the contract already says time is of the essence and then a buyer’s agent on day 11 or 14 or whenever says, “Here’s my inspection report.”

Jon: Yup, I’ve seen it time and time again and it is amazing. As a buyer’s agent it is grossly negligent to not be on top of this. What happens if you’ve got a 10-day inspection period and you forget or you wrote it down wrong or you added the dates wrong or you didn’t understand the importance of it and you go to day 11, as soon as the clock strikes midnight and you’re now on day 11, you have released the inspection contingency, your client bought the property as-is. That’s hugely important and I’ve seen it time and time again though when I’m representing the sellers where a buyer’s agent will submit a repair request outside of that time frame and obviously we try to work in good faith to get a deal done but it puts the seller in a much stronger bargaining position now. They have a buyer who’s already released a key contingency in the contract who may be asking for things but no longer has the leverage to void the contract and walk away. A very different bargaining position as soon as the clock strikes midnight for both parties involved.

Greg: I would point out for the inspection contingency, the time is of the essence is … The agent has to turn in the request for repairs, it’s not just doing the inspection. Is that correct?

Jon: That is correct. Yeah, and again, that’s not the same in every market, but in Louisville, yes. You have to do the inspection and submit your written request for repairs or your notification that you’re voiding the contract within that time frame. It is a hard date, a hard number you have to be inside of. It’s again shocking when you come across malpractice in the industry where people will blow past that date nonchalantly.

Greg: Right. What’s your view, having been in the market for a long time, is this something that you’re a fan of or it doesn’t matter if you like it or not it’s important to know what it is versus other markets? Do you think Bowling Green has it right?

Jon: I like our board contract, I think it covers the bases well. I think it’s important to understand one size doesn’t fit all, we’re all using the same boilerplate contract for all kinds of different deal structures. As long as you understand the provisions and the limitations of our contract, it’s a great document. You may have to edit it a little bit if there’s a particular reason why a deal has to close on December 30, for instance tax consequences. If a deal does not close by the end of the tax year in estate situation or something that might be a very big deal if it rolls over to January 3 instead of December 31. Those types of situations you’re going to want to make sure that you understand time is of the essence and that you include it for the provisions that aren’t part of our boilerplate if it’s going to be important for your situation.

Greg: Let’s use that last example you gave as we get ready to wrap up here. If someone has to close, or whatever their particular need is but we’re going to use close by the end of the year for this example, can you write that in to the contract? You said edit a little bit, can you make that paragraph only?

Jon: Yeah, you handwrite it in. You could say, “Closing to occur on December 31, 2016, time is of the essence.”

Greg: Then that would apply to that paragraph only?

Jon: That would apply to that provision that you’ve written in, exactly. Where I see this come into play a lot, particularly with agents that don’t necessarily read the fine print on some of these things, are when we have a contingency, a buyer’s purchasing a property contingent on the sale of another property. A lot of agents believe that their inspection time frame is going to start once the buyer has sold their house and is now ready to move forward on the new house, that’s when their 10 days or their 14-day inspection period is going to start.

Greg: Big alert to people listening, this is important.

Jon: Yes, this is the important part.

Greg: All right, say it.

Jon: If you read the contract, again the standard format contract documents for our board of Realtors, that time frame starts on acceptance regardless of if the property is contingent on the sale of another home or not. That starts upon acceptance. If that’s not what you want for your buyer client, you got to make sure and write that in. Again, all of these things can be changed. Our contracts aren’t set in stone, it’s a guidepost for us to work from, but you can customize them as long as you understand the components of it and what the provisions mean.

Greg: It helps to customize on the front end, right? Not after you miss the timeline.

Jon: Yeah, you don’t want to beg for forgiveness in these situations, believe me.

Greg: All right. Thank you so much for the education. I’m looking forward to coming back next month and we’ll talk about something else.

​​​​​​​Jon: Excellent. Thanks, Greg.

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