What does "time is of the essence" mean in real estate contracts?

Buying a home is probably the biggest purchase you’ll ever make, and there’s a lot to it. There are inspections to schedule, forms to fill out, loans to secure, and a host of other obligations and necessities. Often, these requirements must be done in a timely manner.

This is where the phrase “time is of the essence” (TIOTE) comes in. A “time is of the essence” clause makes timing a contractual element when purchasing a house. Not all agreements have this clause, but if they do, failing to meet the deadlines could result in a breach of your contract. And that could mean facing consequences like the deal falling through, losing your earnest money, or even legal action.

Let’s explore more deeply what a “time is of the essence” clause means and what you should consider before agreeing to one.

What does ‘time is of the essence’ mean in real estate contracts?

A “time is of the essence” clause is a legally binding provision that can be included in real estate purchase agreements whether you are buying or selling a home. It can also be included in any agreement involving real property, such as contracts you have with a contractor when you build a home. Basically, the TIOTE clause sets a strict timeline for when specific things need to be done by.

Although the agreed-upon deadline is strict, it is set by you and the seller or contractor. In other words, there is no one-size-fits-all timeline. Each one is specific to the situation. However, once set, it is binding, unless renegotiated, so make sure you can make the deadlines before you agree to them. They might even affect your offer on a piece of real estate.

Once set, this clause can be your best friend. It holds both parties, you and the seller or contractor, to set deadlines and helps ensure a smooth and organized march toward a hiccup-free closing.

How does a ‘time is of the essence’ clause change a contract?

Without a TIOTE clause in a real estate transaction when you’re under contract, missing a deadline could be shrugged off and the obligation merely rescheduled. This could have a ripple effect, delaying further obligations and, possibly, the closing.

A TIOTE clause turns mere calendar dates into enforceable obligations that must be met. If either party fails to meet their obligation, like providing documents, or closing on a certain date, they can be declared in default.

That default can open the door to legal consequences, including lawsuits or monetary damages. In short, a TIOTE clause changes a real estate contract in very serious ways.

For this reason, if you’re building a home and entering into a contract with a contractor or builder, you should not only weigh the ramifications of a TIOTE clause but also have a discussion about flexibility. For example, it’s not always possible to foresee and include every possible delay in the clause. While a TIOTE might be a good way to keep a contractor on schedule and accountable, it could prove problematic if it’s too rigid. Consider including some buffer or “wiggle room” to allow for reasonable negotiations of a missed milestone.

Should you agree to ‘time is of the essence’ clauses in sales contracts?

There are many variables to consider when deciding whether a TIOTE clause in your real estate contract is right for you.

First, understand that most real estate contracts include some kind of timeline, with deadlines that must be met by both the buyer and seller or contractor. In addition, in competitive markets sellers often insist on TIOTE clauses to filter out unserious or uncommitted buyers. If a buyer is willing to accept a TIOTE clause, it signals that they are willing and able to close on time.

If you’re a buyer, a TIOTE clause can help speed the transaction along and secure the home before another buyer snatches it up.

There is not any one TIOTE clause that fits every situation. Further, if a TIOTE clause is overly burdensome or creates an unrealistic timeline that you can’t meet, it could spell costly trouble or delay. You should ask your real estate attorney or real estate agent for their advice before signing on to any TIOTE. If you don’t have either yet, make sure to do your due diligence in finding a good real estate agent.

Most importantly, a good TIOTE is not only enforceable, but also reasonable and achievable. These two traits make a TIOTE effective and helpful instead of ineffective and oppressive.

If you’re a seller

For sellers with critical deadlines or timely needs, a “time is of the essence” clause could be extremely beneficial. For instance, let’s say you’re selling your home because you're moving to a new state for a job that has a hard start date. A delayed closing date could jeopardize your move or job. So, a TIOTE clause could ensure your sale moves along smoothly, as well as provide some peace of mind during a stressful time. It holds the buyer to a strict schedule.

Without a TIOTE clause, if a buyer asked for an extension to the contract days before closing, you might feel pressured to acquiesce. But with the clause, you have leverage to push for a timely close without seeming unduly unreasonable. After all, the buyer agreed to the clause and, presumably, doesn’t want to risk their earnest money or other consequences in the contract.

Of course, the enforceability of any TIOTE clause depends on its clarity, the specificity of the conditions, and the achievable deadlines in it. So make sure to spell out timelines for important contingencies, such as home inspections and home appraisals.

If you’re a buyer

Not all TIOTE clauses are alike because not all situations are alike. Here are a few examples of different scenarios you might find yourself in as a buyer and how a TIOTE clause could affect you.

If you need a loan

If you’re like most homebuyers, you will take out a mortgage to buy your new home. Since getting a mortgage requires a lot of documentation, which can be time-consuming, a TIOTE clause can make the process more difficult and stressful.

For instance, if you encounter problems such as appraisals falling short of the agreed-upon price, you might need to come up with more cash. Or say an inspection turns up a badly needed repair, and that can’t be done within the deadline outlined in the TIOTE clause.

These can cause delays in the financing, which could put you in material breach of contract due to the TIOTE clause. That could mean losing the house, your earnest money, or, depending on what’s in your contract, having other consequences.

It’s important to take a few preventative steps ahead of time. Negotiate ahead of time how delays, if they arise, will be handled. For example, you could ask for an agreed-upon extension if issues arise.

Second, get preapproved for your loan. This goes a long way in assuring everyone, especially the seller, that once all issues are resolved, financing won’t be a problem.

Finally, choose a reputable lender with a good reputation. This way, there will be no surprises when it comes to paperwork and funding.

If you’re an all-cash buyer

All-cash buyers have a significant advantage over those needing a mortgage to buy a home. They don’t need a lender’s approval, so buying real estate can be a smooth, fast process. For this reason, sellers love them, especially sellers with a TIOTE clause in play.

However, if you are an all-cash buyer, you shouldn’t get too complacent. Just because you can move quickly doesn’t mean you should. You still need to do your due diligence and take steps to protect yourself.

Make a point of getting a professional and thorough home inspection and a comprehensive title search to make sure there aren’t things such as structural issues or unresolved liens on the property that will lead to trouble.

Also remember to arrange for homeowners insurance, have your legal and financial advisors look over any contracts, and ensure your funds are accessible.

Remember, even in cash deals, problems can arise, and a TIOTE clause can protect you as much as it does the seller.

Are ‘time is of the essence’ clauses enforceable?

Yes, “time is of the essence” clauses are enforceable if they meet certain standards. Courts won’t automatically enforce a deadline if the TIOTE clause is not properly written and clearly spelled out in the contract.

Here are a few specific things that make a TIOTE enforceable:

• Clear language: The contract needs to state that “time is of the essence.”
• Mutual agreement: Both parties in the contract must agree to its terms.
• Reasonable deadlines: Courts must deem deadlines as not unreasonably short or unfair to one party.
• Notice of breach: If one party misses a deadline, a notice may need to be given before the offended party can take legal action.
• Compliance with state law: States have different laws regarding TIOTE clauses, which can affect their enforceability.

If a TIOTE meets legal thresholds, missing a deadline can lead to a breach of your agreement. That can result in potential legal action.

Of course, unforeseen issues do arise, and courts and most people understand this and take these under consideration. For instance, natural disasters or other major events could force a deadline to be missed through no fault of either party.

Courts also recognize that some reasonable flexibility should be allowed for amending a breach, fulfilling closing day, and completing other important milestones.

The bottom line: Make sure you understand the terms of any real property contracts you enter

Because buying real estate is a major step in your life, a “time is of the essence” clause should not be taken lightly. Drafted carefully and clearly, it can provide protection for your interests and help a deal run smoothly.

It can also come with risks, financially and legally. It can be helpful to have a real estate attorney review any TIOTE clause and the sale contract. That way, you’ll fully understand the timeline, the requirements, and the ramifications for breaching them.

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