What's a 'time of the essence' letter and when is it useful?
It is a legal tool to keep the closing on track.
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If you're a buyer or seller trying to get a deal done in New York City right now, it's very possible the closing has been delayed. Keeping a deal on track requires flexibility from both parties as you try to navigate obstacles caused by the pandemic, and a delay can potentially jeopardize the deal entirely. That's where a "time of the essence" letter comes into play.
Typically, a closing date in a contract is an approximate date. For example, a contract might say the closing will take place "on or about," or "on or before," a future date. Both parties understand that the closing will take place as close to that date as possible but not more than 30 days beyond it.
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"In New York it is custom, not law, that a buyer or seller has up to 30 days to adjourn the closing," says Craig L. Price, partner at Belkin, Burden & Goldman. But if a buyer or seller is dragging their feet, a time of the essence letter can be used to keep the sale on track.
"If parties aren't ready to close and or if circumstances similar to the one we are currently in—where people are trying to delay—the way to [create] a firm closing date is to send out a time of the essence letter and that sends out a notification to the other party—the buyer or seller, whoever it is—that the other has set out a specific date, time and location for the closing to take place and declared it as time of the essence to the obligations under the contract," Price says. The date is legally referred to as the law date.
Another purpose for the letter is as a "table setter," Price says, to clearly lay out the steps you have taken to try to establish the closing. If you are the seller and your buyer doesn't show up for the closing outlined in the time of essence letter, it "enables the seller to stake a claim on the deposit," Price says, which is typically 10 percent of the purchase price.
However, Price calls the time of the essence letter an "imperfect remedy" that won't necessarily allow parties to avoid costly legal action. One reason is that a buyer who does not close can object to the deposit being released from escrow to the seller.
Similarly, if you are a buyer and your seller doesn't show up, you can terminate the contract and ask for your deposit to be returned, but it still doesn't rule out a possible court case to get your hands on those funds. The other option is to bring an action for specific performance. Either scenario "can result in a protracted court case," Price says.
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