Time Is Of The Essence Clauses: Do They Always Require Strict Compliance With The Contract?

In Magic Carpet Ride, LLC v. Rugger Investment Group, LLC (2019) DJDAR 9998, Rugger contracted to sell its airplane to plaintiff Magic Carpet Ride (MCR).  The airplane was subject to a mechanic’s lien which was required to be removed.  The escrow on the plane closed and MCR took possession of the plane and gave Rugger 90 days from the close of escrow to remove the lien.  $90,000 was held back in escrow in the event the lien was not removed.  The contract contained a “Time is of the Essence” provision.

Rugger was eight days late in removing the lien and had to pay $38,000 to do so.  The parties, therefore, sued each other with respect to who was entitled to the $90,000.

The trial court found that Rugger breached the contract because it did not remove the lien within 90 days.  Rugger argued that it substantially performed and therefore was entitled to receive the $90,000 or it would suffer forfeiture and MCR would obtain a windfall (i.e. a price reduction of $90,000).  The Court of Appeal reversed the trial court when considering whether it was equitable to allow the forfeiture of the $90,000 to take place.   The Appellate Court noted that MCR had possession of the aircraft during the 90 days and as noted, and thus Rugger would lose not only the $38,000 it spent to get the lien released but also the $90,000 consideration for the plane.

The Appellate Court noted that there are cases that state that when time is made of the essence of a contract, failure to perform within the time specified is a material breach of the contract, citing Goldmine & Water Company v. Winterton (1943) 23 Cal.2d 19 and U.S. Hertz, Inc. v. Niobrara Farms (1974) 41 Cal.App.3d 68, 78.  The Appellate Court also reviewed a case where purchasers of land failed to make payments of the purchase price within the timeframe specified, finding that the buyer was required to strictly comply with its obligations, citing Pitt v. Mallaliu (1948) 85 Cal.App.2d 77, 81.  The Appellate Court also looked at the Restatement 2d of Contracts which analyzed substantial performance as a category of failure to render performance (Rest. P.2d Contracts, § 237, Com. D., P. 220).

The Court noted five factors are to be considered, including (1) “the extent to which the injured party will be deprived of the benefit which he reasonably expected; (2) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (3) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (4) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking into account all the circumstances including any reasonable assurances; and (5) the extent to which the behavior  of the party failing to perform or to offer to perform comports with the standards of good faith and fair dealing.”

Again, in this case, the Appellate Court found that Rugger substantially performed and remanded the case back to the trial court to consider whether Rugger would suffer a forfeiture by failing to receive the $90,000.  The Appellate Court also considered other cases where a party did not close escrow in a timely manner yet was found not to be in breach, including Williams Plumbing Company v. Sinsley (1975) 53 Cal.App.3d 1027 (buyer’s delay in depositing the balance of purchase price did not give the seller the right to terminate the contract); MacFadden v. Walker (1971) 5 Cal.3d 809, 811 (Buyer made payments on a land sale contract for 10 years then stopped, causing the seller to terminate the buyer’s rights and sue to quiet title.  After the buyer offered to pay the entire balance and sued for specific performance, the Supreme Court held that “the anti-forfeiture policy recognized in Freedman v. The Rector (1951) 37 Cal.2d 16, case justifies awarding even willfully defaulting vendees specific performance in proper cases.”.)

In this case the Court noted that the buyer did not suffer any damages, yet the seller would have suffered considerable losses if the court strictly enforced the terms of the agreement due to the “time is of the essence” provision.

In view of the above, parties should never take for granted that a court would find a buyer in default simply because they failed to close escrow or perform in a timely fashion.

View The Original Article At First Team Real Estate Orange County