Sad to say but it occasionally - maybe even frequently - happens that when the scheduled time for closing comes, neither party is ready to perform. So what happens then? No doubt what happens most of the time is that both buyer and seller continue their efforts and eventually the transaction closes. But suppose that one of the parties has had a change of heart. Can they simply cancel on the grounds that the other has breached? A recent California ruling (Tornel v. Office of the Public Guardian of Los Angeles County) shows that it is not that simple.

In May of 2008, Mario Tornel and Martha Silva (buyers) purchased a home at an auction conducted by the Public Guardian of Los Angeles County acting in its capacity as conservator of the estate of Mary Buchenau. On August 1 the probate court confirmed the sale at a price of $254,000. Escrow instructions provided that the buyers would deposit 10% of the purchase price and that the remaining $228,600 was to be paid to the escrow holder no later than two working days prior to close of escrow. Also, before the close of escrow the conservator was to deliver all instruments necessary for the transfer of title. Escrow was scheduled to close on September 30.

The buyers put their deposit into escrow, but by September 30, neither party had tendered performance. The buyers had not deposited the balance of the purchase price and the conservator had not supplied the deed.

On October 15, a party acting on behalf of the buyers wrote the escrow company requesting that the escrow be cancelled and the deposit returned. Then, on October 19 - roughly twenty days late - the conservator delivered the deed to escrow. The buyers, however, refused to consummate the purchase, claiming the conservator was already in breach. They insisted that the escrow be cancelled and their deposit returned.

The conservator then filed a petition with the court to vacate the order confirming the sale so that the property could be marketed to new buyers. The conservator also requested authority to retain the deposit and to be awarded damages. The probate court granted the petition, and continued the matter until resale, at which time damages could be assessed.

When the buyers attempted to have this order set aside, the court gave them the opportunity to complete the sale at the original purchase price, but they declined. Subsequently, the property resold for a lower price. Not only did the buyer's lose their deposit, they were assessed $34,662 in damages. Of course they appealed.

California's Second Appellate District Court upheld the lower court's ruling. The appellate court observed that "It is well established that if it is not clearly specified that time is of the essence in an escrow transaction, a 'reasonable time' is allowed for performance of the escrow conditions." There was no "time is of the essence" provision in this sale, and there was nothing that implied that timing was essential. The buyers "presented no evidence at the trial level that a delay of 19 days following a two-month escrow was an unreasonable time for performance."

Moreover, the court spelled out a crucial principle for its ruling: "even if time for performance has expired, a party cannot claim default by the other party as justification to terminate the escrow without either performing or having tendered performance to the other party." [my emphasis] Because the buyers had not deposited their funds as required, they could not successfully claim that the other party had breached.

The moral to this story? Do not complain about the other side not having their ducks in a row, until you have made sure that yours are.

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