Perhaps the most feared phrase in the real estate industry is "Time is of the Essence." When included in an offer, it is enough to send shivers down the spine of even the most experienced real estate agent. It is a very sharp, double edged sword, and should be used only in the right circumstances, and only after an agent has thoroughly explained its ramifications to the client.
Simply stated, if a real estate contract does not say that time is of the essence, then it is not. The contract only requires performance within a reasonable time. If a buyer does not complete a time sensitive obligation by the required date, (for example, obtain a mortgage commitment, complete the inspections, or is unable to close on the specified date), the obligation is not automatically waived nor is he legally in default. Most buyers and sellers do not realize this fact - every real estate agent should.
Rhode Island courts have repeatedly ruled that where time is not of the essence a party is not in default if he has not fulfilled his obligations by the specified dates. The party has a reasonable time to complete the obligations and must act in good faith in completing them. What is reasonable and whether the party acted in good faith is determined by a judge or jury on a case by case basis. Invariably, what is reasonable to one party is not reasonable to the other. Closing five days after the scheduled date is not reasonable to the buyer whose belongings are on a moving van and is paying a daily storage and hotel fee while waiting for the seller to move. Conversely, the seller who is waiting for a buyer to finalize his financing, and needs the sale proceeds to buy a new home, will find an extended closing date emotionally and financially painful.
If a contract includes the phrase "time is of the essence" and a party does not fulfill his obligations by the required date, he is in breach and his noncompliance triggers the default section of the agreement. In addition to getting the deposit, the non-defaulting party is usually entitled to additional monetary damages. These could include storage and hotel fees for a buyer, or per diem charges for a mortgage, condo fees, and real estate taxes for a seller.
Unfortunately, whether a default has occurred is not always clear. The courts have also held that even where time is of the essence, the non-defaulting party may have waived the provision by his actions, or non-actions, as the case may be. It is very important that the non-defaulting party does not do anything that could be construed as hindering the defaulting party from fulfilling the obligations. For instance, a seller must make the house readily available for the home inspection or bank appraisal. Waiving or extending one time period, such as the mortgage commitment date, might be construed as waiving time is of the essence for all sections of the contract, including a closing date. Therefore, the party who needs time to be of the essence must consistently act that way from the day the contract is signed until the closing date. If any extensions are granted, they must be in writing and "time is of the essence" must always be included.
It is extremely important that agents explain the complete ramifications of including the phrase "time is of the essence" in a contract. If a client absolutely, positively has to close on a certain date, and will incur financial hardship if he does not, the phrase should be included. Agents need to ask the question before the contract is signed. While time may, or may not, be of the essence, time is always money. Agents do not want it to be their money because they failed to advise their client on why the phrase was, or more likely was not, included in the contract.
This article contains general information and is not intended to give legal advice. If you have specific questions, you are encouraged to contact an attorney. The R.I. Supreme Court licenses all lawyers in the general practice of law. The court does not license or certify any lawyer as an expert or specialist in any field of practice.