When Do We Close?
In today’s post we turn to Question #2 – “When do we close?.” “Closing” is the focal point of any commercial transaction, with good reason. It’s the date that the purchase price is paid to the seller, title to the property passes to the buyer, and all of the documents necessary to finish the transaction are executed and delivered. Whether closing occurs reliably on time or not turns on three important issues in the execution and performance of the typical commercial real estate purchase and sale contract:
Does the agreement clearly define the closing date?
Is time an agreed essential element of the contract (i.e., is “time of the essence”)?
Has either party failed to perform in any material way that would give the other party to the contract grounds for claiming that the closing must be delayed?
We do well when we check every contract carefully for the answer to these questions before we sign it (or pass it on for signature).
On the first point, an amazing number of the first drafts of commercial real estate sales contracts we review contain an ambiguous closing date, whether intentionally or unintentionally. Sometimes this is a function of deal complexity, particularly in deals involving raw land acquisition for development in which many conditions must be met before the buyer is obligated to close (such as zoning approvals, special permits, and environmental assessments). In a few cases, the buyer apparently believes it’s a benefit to keep the closing date as open-ended as possible, so that closing never has to occur until the buyer is absolutely sure it has met all requirements for building the project and is ready (literally) to break ground on the project the day after closing. In reality, an ambiguous closing date benefits no one, particularly the seller.
The key to maintaining closing date certainty is to be sure the contract contains a firm outside date for satisfaction of all conditions and an outside date for closing. It’s not unreasonable for a seller to insist that the closing occur a fixed number of days after signature of the contract. If the buyer is concerned that the outside date isn’t sufficient to get ready to close, then the contract should give the buyer a certain number of optional extensions (at a cost per extension approximating the seller’s opportunity cost).
Second, whether time is an essential term of the contract, or “of the essence” as usually stated in contracts, is important from both the buyer’s and seller’s side of the deal. On the seller’s side there is the opportunity cost of taking the property off the market while waiting for the buyer to close. On the buyer’s side, there may be tens or hundreds of thousands of dollars in expenses being incurred for inspection and approvals for the anticipated project on the property.
Under Florida law, if time isn’t made of the essence, then the courts imply that a reasonable time will be allowed for the satisfaction of all contract covenants (such as the covenant to close the deal on time). Even if the contract makes time of the essence, the parties can waive it by conduct (for example, by letting critical dates or deadlines slip by under the contract without insisting on strict performance – more on this problem below).
However, here’s an important point to remember: Florida courts have recognized that, even if time is originally of the essence in a contract, and one or both parties waives time as being of the essence, the party can re-establish time of the essence by a letter to the other party insisting that it is. Confusing? Sure, but the alternative is the possibility of being ready to close the deal, but finding that the other party isn’t and has no particular sense of urgency about getting ready.
Finally, closing dates become ambiguous for a reason we’ve already mentioned above: missed deadlines. This often occurs because of, for example, closing dates that are measured from the satisfaction of previous conditions. For example, in some commercial real estate contracts the closing date is measured from the end of a fixed “inspection period” or “diligence period” during which the buyer has the right to terminate the contract if the buyer’s intended purposes for the property can’t be achieved. The end of that period may be in turn measured from earlier dates, such as the date the seller delivers copies of documents from its files that contain information the buyer wants to review concerning the property (such as copies of tax bills, existing permits, rent rolls for tenants).
Be very careful of such provisions. A careless seller who doesn’t make its deliveries on time shouldn’t be surprised when a careless buyer claims that the diligence period hasn’t ended as expected because the seller never delivered copies of its documents. An even worse problem, however, is the buyer that claims extensions because the seller delivered some documents, but not all of them (or at least that’s the argument). Meanwhile, the closing date slips away until no one is exactly sure when the parties are obligated to close.
Don’t let this happen. Ideally, the contract should provide either for a list of documents that will be delivered by a relatively short date to the buyer, or a presumption in favor of the seller that any documents delivered by the deadline are all of the seller’s documents and if no documents are delivered then none exist, unless the buyer objects within a short period after the deadline. Working from critical dates checklists approved by the buyer and seller at or shortly after the contract is signed will also assist in avoid missed deadlines that can cause unpleasant surprises as the (supposed) closing date draws near.
For more “Top Ten Points to Watch for in Commercial Real Estate Contracts,” visit the Florida Real Estate Alert blog.