On December 22, 2009 the North Carolina Court of Appeals handed down its latest interpretation regarding the effectiveness of “time is of the essence” clauses in real estate contracts in the case Phoenix Limited Partnership of Raleigh v. Sarah W. Simpson, et al. Click here to read it.
In Phoenix, the plaintiff entered into a five year agreement (the “Contract”) with the defendants to lease a property that was used as a surface parking lot in Raleigh, North Carolina (the “Property”). The Contract included a call option that granted the plaintiff an option to purchase the Property and a put option that granted the defendants the option to require the plaintiff to purchase the Property. If either option were exercised, the Contract dictated that the purchase price for the Property would be the greater of $853,781.60 or the fair market value of the Property as of the date the option was exercised. The Contract provided that the fair market value of the Property would be determined as is typical in a lot of real estate contracts: each party would pick an appraiser and those two appraisers would pick a third appraiser; and the fair market value would be the average of the two closest appraisals. If either option were exercised, the contract required that closing would take place 180 days following the date the option was required. Importantly, the contract also included the following clause: “With respect to the performance of the obligations and duties in this Section [relating to the options], time is of the essence.”
On September 13, 2000, the defendants provided plaintiff with the required notice that the defendants were exercising the put option. The closing date established by the Contract was March 13, 2001. On December 8, 2000, a Phase I Environmental Assessment for the property reported the existence of multiple environmental issues that required a further Phase II Environmental Assessment. Prior to March 13, 2001, the appraisers issued a report estimating the fair market value of the Property to be $947,500.00. The appraisal report also included a note that the value would be adjusted downwards if the environmental issues on the Property continued. No closing occurred on or before March 31, 2001. However, on March 26, 2001, the defendants executed a general warranty deed and delivered it to the Plaintiff’s attorney (the “Deed”). The Deed was stamped copy and did not contain a notary seal or stamp.
On April 17, 2001, the Phase II Environmental Assessment report was completed and it revealed groundwater contamination on the Property. On April 26, 2001, the parties met to discuss the status of the transaction. On July 12, 2001, the defendants’ realtor informed the plaintiff that the defendants had hired a consultant to conduct further environmental tests to determine the source of the contamination. On December 21, 2001, the defendants’ realtor informed plaintiff that it had been determined that the groundwater contamination was caused by former dry cleaning activities conducted on the Property. The defendants realtor also informed the plaintiff that the defendants intended to enter the Property into the North Carolina Dry-Cleaning Solvent Act program.
On August 18, 2004, more than 3 years later, during which time there were no discussions between the parties, the plaintiff’s attorney sent a letter to the defendants inquiring about the Property. The defendants responded on September 23, 2004 that the Property had been put on the market for sale. On January 21, 2005, the defendants entered into an agreement to sell the Property to a third party for $1,352,560.00.
What did the North Carolina Court of Appeals Decide Based On These Facts?
1. An interlocutory Order of the Trial Court granting specific performance and requiring a party to convey a property affects a substantial right, and thus offers an immediate right of appeal.
-The Trial Court in this matter granted plaintiff’s Motion for Partial Summary Judgment and determined that the plaintiff was entitled to specific performance of the Contract. The Trial Court ordered that defendants convey the Property to plaintiff upon the tendering of the purchase price of $947,500.00. Other issues remained in the matter so the ruling was interlocutory; however, the Court of Appeals held that the defendants were entitled to an immediate appeal because a substantial right was affected by the interlocutory ruling.
2. A “time is of the essence” clause is waived when a party (i) does not insist on closing on the contract’s specified closing date and (ii) makes statements and takes actions manifesting an intent that closing should occur at some unspecified later date.”
-The Court of Appeals noted that the defendants offered no evidence that the defendants ever told the plaintiff that the defendants were insisting that closing take place on March 13, 2001. The Court of Appeals also noted testimony from the defendants that they expected closing to occur after March 13, 2001. Furthermore, the defendants made clear to the plaintiff that they would keep the plaintiff advised as to their efforts to rectify the environmental issues on the Property. The Court of Appeals found that these “undisputed facts establish conduct that naturally would lead plaintiff to believe that defendants had dispensed with their right to insist that time was of the essence with respect to closing on the property.
3. The clock to determine a reasonable period of time in which to complete performance under a contract does not begin to run until the seller advises the buyer that the seller is ready, willing, and able to close.
-The defendants argued that the plaintiff did not attempt to close on the Contract within a reasonable period of time because the plaintiff waited more than 3 years to try to close on the contract. However, the Court of Appeals agreed with the plaintiff’s argument that the defendants by their conduct indicated to plaintiff that they had elected to address the contamination on the Property rather than reduce the purchase price to reflect their liability for contamination on the property. Based on this position, the Court of Appeals determined that the defendants needed to notify the plaintiff that the defendants had completed cleanup of the Property and were ready and able to perform under the Contract before the reasonable period of time clock started.
On September 13, 2000, the defendants provided plaintiff with the required notice that the defendants were exercising the put option. The closing date established by the Contract was March 13, 2001. On December 8, 2000, a Phase I Environmental Assessment for the property reported the existence of multiple environmental issues that required a further Phase II Environmental Assessment. Prior to March 13, 2001, the appraisers issued a report estimating the fair market value of the Property to be $947,500.00. The appraisal report also included a note that the value would be adjusted downwards if the environmental issues on the Property continued. No closing occurred on or before March 31, 2001. However, on March 26, 2001, the defendants executed a general warranty deed and delivered it to the Plaintiff’s attorney (the “Deed”). The Deed was stamped copy and did not contain a notary seal or stamp.
On April 17, 2001, the Phase II Environmental Assessment report was completed and it revealed groundwater contamination on the Property. On April 26, 2001, the parties met to discuss the status of the transaction. On July 12, 2001, the defendants’ realtor informed the plaintiff that the defendants had hired a consultant to conduct further environmental tests to determine the source of the contamination. On December 21, 2001, the defendants’ realtor informed plaintiff that it had been determined that the groundwater contamination was caused by former dry cleaning activities conducted on the Property. The defendants realtor also informed the plaintiff that the defendants intended to enter the Property into the North Carolina Dry-Cleaning Solvent Act program.
On August 18, 2004, more than 3 years later, during which time there were no discussions between the parties, the plaintiff’s attorney sent a letter to the defendants inquiring about the Property. The defendants responded on September 23, 2004 that the Property had been put on the market for sale. On January 21, 2005, the defendants entered into an agreement to sell the Property to a third party for $1,352,560.00.
What did the North Carolina Court of Appeals Decide Based On These Facts?
1. An interlocutory Order of the Trial Court granting specific performance and requiring a party to convey a property affects a substantial right, and thus offers an immediate right of appeal.
-The Trial Court in this matter granted plaintiff’s Motion for Partial Summary Judgment and determined that the plaintiff was entitled to specific performance of the Contract. The Trial Court ordered that defendants convey the Property to plaintiff upon the tendering of the purchase price of $947,500.00. Other issues remained in the matter so the ruling was interlocutory; however, the Court of Appeals held that the defendants were entitled to an immediate appeal because a substantial right was affected by the interlocutory ruling.
2. A “time is of the essence” clause is waived when a party (i) does not insist on closing on the contract’s specified closing date and (ii) makes statements and takes actions manifesting an intent that closing should occur at some unspecified later date.”
-The Court of Appeals noted that the defendants offered no evidence that the defendants ever told the plaintiff that the defendants were insisting that closing take place on March 13, 2001. The Court of Appeals also noted testimony from the defendants that they expected closing to occur after March 13, 2001. Furthermore, the defendants made clear to the plaintiff that they would keep the plaintiff advised as to their efforts to rectify the environmental issues on the Property. The Court of Appeals found that these “undisputed facts establish conduct that naturally would lead plaintiff to believe that defendants had dispensed with their right to insist that time was of the essence with respect to closing on the property.
3. The clock to determine a reasonable period of time in which to complete performance under a contract does not begin to run until the seller advises the buyer that the seller is ready, willing, and able to close.
-The defendants argued that the plaintiff did not attempt to close on the Contract within a reasonable period of time because the plaintiff waited more than 3 years to try to close on the contract. However, the Court of Appeals agreed with the plaintiff’s argument that the defendants by their conduct indicated to plaintiff that they had elected to address the contamination on the Property rather than reduce the purchase price to reflect their liability for contamination on the property. Based on this position, the Court of Appeals determined that the defendants needed to notify the plaintiff that the defendants had completed cleanup of the Property and were ready and able to perform under the Contract before the reasonable period of time clock started.
No comments:
Post a Comment