You need to sell your business. Your financial situation is dire, and a business sale is your lifeline. A buyer appears. Everything seems great. The parties negotiate the terms without incident. The town council needs to approve the transfer of the business license, but everyone is confident that the council will do so. The buyer signs your asset purchase agreement, with the closing to take place three days after the buyer obtains the town council’s approval of the transfer. To drive home the point that you want (and need) this deal done, as soon as possible, you include a “time is of the essence” clause in your contract.
Then … the buyer does not rush to the town council. He takes his time, and six months later, finally submits the transfer application. However, the council does not approve the transfer. The buyer does not appeal that decision … And the transaction never closes.
You struggle on. In fact, the business picks up a little. The wolf backs away from the door. But then the buyer steps back in—with a summons. Two years later, the buyer reappears and seeks specific performance of the sale agreement. What are you to do?
What is a “time is of the essence” clause?
Time is not typically presumed “of the essence” in a basic transaction. E.g., Equity Res. Fund XV v. Pub. Storage, Inc., 15 Mass. L. Rptr. 188, 2002 WL 31187684, *4 (Mass. Super. Ct. Aug. 12, 2002) (sale of partnership shares) (citing Limpus v. Armstrong, 3 Mass. App. Ct. 19, 22; 322 N.E.2d 187 (1975) (sale of real property). This is particularly true in a commercial contract, where a non-breaching party owed money can be made whole by the payment of interest. Setting a closing date does not, by itself, make “time of the essence.” Limpus, 3 Mass. App. Ct. at 21-22. Thus, a deal is not automatically terminated if the closing passes without performance. E.g., Equity Res. Fund XV, 2002 WL 31187684 at *4; Curley v. Mobil Oil Corp., 860 F.2d 1129, 1132 (1st Cir. 1988) (applying Massachusetts law). If that happens, one party may then demand the transaction be completed within a “reasonable time.” Merry v. A.W. Perry, Inc., 18 Mass. App. Ct. 628, 630; 469 N.E.2d 73 (1984). Giving that notice makes “performance within the specified time of the essence of the contract.” Id. If a party does not give that notice, however, it has no right to repudiate the contract. The contract still exists. Limpus, 3 Mass. App. Ct. at 22-23; Equity Res. Fund XV, 2002 WL 31187684 at *4.
For example, in Equity Resource Fund XV, the defendants sought to repudiate a settlement agreement based on the plaintiff’s untimely performance. However, the court rejected the defendants’ argument that the agreement was effective when the defendants signed in May, and not when the plaintiff signed in July. The court refused to find that “time was of the essence” in executing and implementing the settlement agreement without an express provision. Rather, the court held that the parties’ setting of a closing date, then continuing to deal with each other after that date passed, demonstrated that time was not of the essence. 2002 WL 31187684 at *4. Likewise, in Avon Tape, Inc. v. Shuman, the court refused to find the defendant breached a stock purchase agreement with a former executive, when the defendant failed to close the purchase of the stock within 60 days, as required by the agreement. The agreement contained no “time is of the essence” clause, and the court found the parties continued to deal with each other, “casually,” without either party demanding immediate performance. No. 040068BLS, 2006 WL 933395, **5-6 (Mass. Super. Ct. Mar. 22, 2006).
All this changes when the parties include a “time is of the essence” clause. “[P]arties will be held to the deadlines they have imposed upon themselves when they agree in writing that time is to be of the essence.” Owen v. Kessler, 56 Mass. App. Ct. 466, 469; 778 N.E.2d 953 (2002); Davis v. Dawson, Inc., 15 F. Supp. 2d 64, 119 (D. Mass. 1998) (citing Vickery v. Walton, 26 Mass. App. Ct. 1030, 1031; 533 N.E.2d 1381 (1989)). This provision creates a condition subsequent which, if not satisfied or waived, extinguishes the parties’ mutual obligations. McCarthy v. Tobin, 429 Mass. 84, 88; 706 N.E.2d 629 (1999); Vickery, 26 Mass. App. Ct. at 1031. In other words, if an agreement to sell and purchase a business provides that the closing is on January 31 at 3:00 p.m. and “time is of the essence,” the seller’s failure to show up at that date and time, ready to go, allows the buyer to cancel the contract and recover any deposit. Likewise, the buyer’s inability to close frees the seller to cancel the contract and sell the business to someone else. Similarly, the failure to meet a material contractual deadline resulted in a breach, which excuses the other party’s performance.
Thus, in Collias v. Lavallee Associates, Inc., the plaintiffs, knowing that the defendant was in “desperate” financial condition, sought to purchase her package store and the land on which it was situated. The defendant initially agreed to sell only the store. The parties executed an agreement stating that the sale “must be finalized” within 24 hours of approval of the transfer of the store’s liquor license. 62 Mass. App. Ct. 1117, 2004 WL 3029944, *1 (Dec. 31, 2004). The agreement required the buyer to “use good faith” in obtaining the transfer “as quickly as is reasonably possible,” and required the seller to cooperate in effectuating the transfer. Id. A few months later, the seller also agreed to sell the real estate. The second sale agreement incorporated the first and provided that “time was of the essence,” and the closing would occur within five days of the transfer of the liquor license. Despite these provisions, the buyer did not immediately apply for the transfer. He did not file the transfer applications until approximately twelve months after execution of the first agreement, and three months after execution of the second agreement. Id. at *2. The court rejected his suit for specific performance of these agreements, holding that the buyer’s failure to timely obtain the transfer of the liquor license excused the seller’s performance. Id. at **2-3.
Likewise, in Davis v. Dawson, Inc., the plaintiffs entered into an agreement to sell the defendants the stock of the plaintiffs’ subscription service business, Faxon. Faxon’s business was failing, and its board authorized a sale to resolve significant business debts. 15 F. Supp. 2d 64, 72-73 (D. Mass. 1998). Faxon discussed a sale with the defendants and other potential buyers before ultimately contracting with the defendants. The parties then disputed the terms and ultimate purchase price. The agreement provided that the defendants could take a purchase price adjustment if their auditors conducted an audit and provided an “adjusted closing net worth” within 60 days of the closing. Id. at 109-11. The agreement included a “time is of the essence” clause specific to “all dates and time periods set forth or referred to in” the agreement. Id. at 119. The court held that the performance of the audit and calculation of the adjusted closing price within 60 days of the closing was necessary for the defendants to obtain the purchase price adjustment, and their auditors’ failure to provide the adjusted closing price excused the plaintiffs from having to adjust (and reduce) the purchase price. Id. at 113, 118.
Waiver of the “time is of the essence” requirement.
As strict as all that sounds, a party’s failure to comply with contractual deadlines can be waived. The waiver might be expressed based on the parties’ agreement. Or it may be implied, based on the parties’ actions. Owen, 56 Mass. App. Ct. at 470. Courts most often find waiver of the “time is of the essence” provision when the parties continue to deal with one another after a missed deadline. Counsel may, however, protect a client against implied waiver by being clear that the non-breaching party reserves all rights to enforce the “time is of the essence” provision.
In some cases, courts have found that the non-breaching party waived compliance with the “time is of the essence” clause by an express extension of the missed deadline, or by failing to object to the missed deadline. In other cases, courts have found waiver where both parties continue to act as if the agreement is in place, despite the missed deadline.
For example, the seller waived the “time is of the essence” clause by agreeing to extend the closing date several times. Church of God in Christ v. Congregation Kehillath Jacob, 370 Mass. 828, 832-33; 353 N.E.2d 669 (1976). The seller’s conduct also demonstrated waiver, because the seller continued to accept payments and other performance under the contract well after the original closing date had passed. Id. at 834-35.
In FDIC v. Slinger, the seller implicitly extended the closing date by more than three years, despite a “time is of the essence” clause when he did not object to the buyer’s extension notices. 913 F.2d 7, 11-13 (1st Cir. 1990). On one occasion, the seller’s agent also explicitly consented to the extension. Three years after the specified closing date, the parties were still operating under the purchase and sale agreement (“PSA”), when the seller finally defaulted on a mortgage, and the building was foreclosed. Under Massachusetts law, the federal appeals court held that the buyers should receive their deposit from the proceeds of the foreclosure sale because the PSA was still in force when the foreclosure occurred. Id. at 13.
Of course, courts also find the “time is of the essence” requirement is not waived, particularly when the non-breaching party terminates the deal within a short time after the missed deadline or reserves its rights with respect to the breach—even if the party evinces some willingness to continue to work with the breaching party.
Thus, in Hubbardston, LLC v. Karlin, the court found no waiver of a “time is of the essence” provision in connection with the purchase of two promissory notes. On the closing date, the buyer proposed to reduce the purchase price. The seller declined, and the closing did not go forward. The court found no breach of contract, as the plaintiff-buyer failed to tender payment on the closing date, and “time was of the essence” under the contract. The court found no waiver by the defendant-seller, as the parties did not speak to each other for five days following the closing date, and the seller declined the buyer’s subsequent offer to purchase the notes on the previously agreed terms. 92 Mass. App. Ct. 1120, , 2017 WL 661335, *1 & n.5 (Mass. App. Dec. 28, 2017).
In Davis, the court found “little if any evidence of a waiver … of the time to perform the audit.” 15 F. Supp. 2d at 120. The parties continued to deal with each other after the audit date had passed. The defendants even obtained a second audit approximately nine months after the closing. However, the court found that the plaintiffs’ conduct did not indicate in any way that they waived the adjusted closing price requirement. See id.
In a leading real estate case, Owen v. Kessler, the tenant and her neighbor both sought to purchase a house. The neighbor made the first offer, which the seller accepted. The offer stated that a PSA had to be executed by 11 a.m. on September 26, and “time is of the essence hereof.” Because it seemed the tenant was blocking a building inspection, the seller and neighbor discussed possibly extending the September 26 deadline. No extension was ultimately necessary. The PSA was prepared and signed by the neighbor in advance of the deadline. But the neighbor’s agent delayed in delivering the PSA to the seller until 11:20 a.m. Because the agreement was late, the seller canceled it and sold the house to the tenant. The appeals court approved this action. After the deadline passed, the seller no longer owed any obligations to the neighbor. And although the seller indicated a willingness to extend the September 26 deadline if necessary, the court found this willingness differed substantively from actually granting an extension.
Returning to the hypo, your clients are likely off the hook for the sale of their business to this buyer. Of course, they may choose to waive the breach of the “time is of the essence” clause. But it is unlikely that a court would hold them to the deal.
If you find yourself amid a deal or a business dispute, you may need to turn to attentive counsel to protect you. Pakrooh Law, P.C. regularly deals with contracts and business disputes, and we are fully prepared to give the counsel and guidance that you need.