Our friend, Bob Arneal, one of the sharper tools in the real estate manager shed, asks an important albeit simple question: "What are the seller's rights when the buyer does not close escrow on time?" It is not only an important question; it is also a tough one.

I think that the initial reply that most lawyers would give -- perhaps especially real estate attorneys -- would be, "It depends." Fair enough. On what, then, we ask next, would it depend? Well, certainly it would depend on what is written in the contract. In this regard, most situations will be similar. The vast majority of residential purchase agreements in California are written up on the standard contract provided by the California Association of Realtors (CAR). So, for most California cases, the contract language will be the same -- unless some agent has been creative, writing in his or her own terms. Unfortunately, though, the contract is somewhat vague on this issue.

The other, usually more telling circumstance will have to do with what actions have occurred during the course of the escrow period. The possibilities are endless, but the important issue has to do with whether or not the seller has done things (or, in some cases, has failed to do things) that would lead the buyer to believe that an extension of the escrow period would be acceptable.

A column written early last year dealt with the important case of Galdjie v. Darwish. In that matter the Second Appellate District Court of Appeal affirmed a Superior Court judgment that allowed Galdjie, the buyer, to sue the seller, Darwish, for specific performance after Darwish attempted to cancel their escrow. The problem was that the seller -- through various conversations, writings, and behavior -- had allowed the buyer to go months past the original closing date, and then tried to cancel even though "she did not re-establish time conditions by giving notice that the deal must close by a certain date."

The lesson to sellers from the Galdjie case: If you are going to grant extensions, be sure to spell them out carefully.

The Galdjie decision also contained an interesting and important discussion of time deadlines and the typical contractual provision that time is of the essence. In summary, it's point was that, in the absence of factual situations such as occurred in the Galdjie case, "… California courts generally do strictly enforce time deadlines in real estate contracts, permitting the seller to cancel after the time specified where time is specifically made of the essence unless there has been a waiver or potential forfeiture."

The court's discussion in Galdjie also provides a possible explanation as to why one can find such a divergence of opinions among attorneys as to whether or not time deadlines in real estate contracts really are strictly enforceable. The court made reference to a discussion of this issue in California Real Estate by Miller & Starr. Now, the Miller & Starr text has near-biblical status in the eyes of many California real estate attorneys; and, as it turns out, the Miller & Starr view on this issue is that, "…the mere failure of one party or both parties to perform … within the time specified in the contract does not terminate the contract automatically." Miller & Starr go on to maintain that an earlier opinion (Pittman v. Canham) was "contrary to the weight of authority" when it upheld the right of a party to terminate a contract when a time period had expired (presuming there was no waiver of the provision).

But, to put it in a nutshell, the Galdjie discussion says that Miller & Starr are wrong about this.

It's probably safe to say, though, that more attorneys are familiar with Miller & Starr than are familiar with the discussion in Galdjie. Hence, perhaps, the divergence of attorney opinions as to whether or not a seller can cancel when a buyer does not close escrow on time.

In the next column we will look at some of the other issues that arise when a buyer does not close escrow on time.

Published: October 7, 2005

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