What Does “Time Is Of The Essence” Mean In Real Estate Contracts?

When you’re buying or selling a house, you’re generally anxious to get the sales part over with so you can start moving in or out.

A “time is of the essence” clause makes timing a contractual element when purchasing a house, and failing to meet these deadlines could result in a breach of your contract. This clause emphasizes that both parties should act as quickly as possible.

If you’re about to enter into a purchase agreement for your next home, it’s important that you understand that this is a legal document and it will be interpreted according to what those terms mean in law, not what you thought it meant when you signed.

Let’s take a look at what “time is of the essence” means, and how it can affect your contractual obligations when you sign a purchase agreement for your next home or enter into a contract to have one built.

What Does ‘Time Is Of The Essence’ Mean?

“Time is of the essence” (TIOTE) refers to a clause that can be included in real estate purchase agreements when you’re selling or buying a home, or when you enter into a contract with a contractor to build a home. Dates become a key part of the agreement when a TIOTE clause is included in a contract. This means if any of the parties involved miss any important dates, they’re in breach of contract.

As the breaching party, they may be required to pay damages or suffer other consequences, like the loss of the contract, according to the terms of the contract, regardless of the reasons for a failure to perform in a timely manner.

For good reason, most parties to a contract don’t want to commit themselves too strictly to a time frame that could change through no fault of their own. Most would also prefer not to waive any rights they would otherwise have in order to explain why they failed to comply with the agreed-upon schedule.

How Does A ‘Time Is Of The Essence’ Clause Change A Contract?

Contracts that do not include a TIOTE clause are judged by a reasonableness standard that looks at the circumstances that prevented timely completion. For example, if the pandemic lockdown in 2020 or supply chain issues prevented a contractor from completing a phase of your new home’s construction, it would be considered a reasonable delay brought on by extenuating circumstances.

But if a TIOTE clause had been inserted into the contract, the contractor would have been in breach of the contract, with no chance to state their case. With a TIOTE clause, the reason behind noncompliance doesn’t matter. The fact that the completion didn’t occur on the date specified causes the breach of contract.

With TIOTE, the contractor in our example might face losses or a lawsuit tied to meeting the completion dates.

Should You Agree To Make Time Of The Essence In Sales Contracts?

In general, it’s best for both parties to avoid this clause if possible. The sale of the property is being moved along by both real estate agents and the mortgage lender in addition to the buyer and the seller. If a seller is in a rush, most buyers will try to accommodate the seller’s desire to close quickly, especially in tight seller’s markets.

If a seller insists on including a TIOTE clause, and you need a mortgage to complete the purchase, make sure the timeline is a realistic one and that it’s padded for unexpected delays. If you can, ask your real estate attorney for their best legal advice on how to proceed.

An Example For Sellers

Let’s assume that you’re selling your house. You include a TIOTE clause in the purchase agreement because you want to move ASAP.

Your contract states that an appraisal report must be completed by a particular date, which means you must grant the appraiser access to your home by a specified date. It can take a week or two to get the appraisal done.

As an example, let’s say it was difficult to schedule a time for the appraisal in the first place, but then the appraiser had to cancel because of a personal emergency. So, by the time it’s rescheduled, you’re right up on your deadline.

Then you get stuck in traffic and miss the appointment with the appraiser. They cancel to go to their next appointment. This puts you in breach of contract.

Even with reasons behind the missed appointment, your buyer could walk away from the deal with their earnest money.

An Example For Buyers

There are many problems that are complicated by strict TIOTE clauses. Here are a few examples:

If You Need A Loan

For a buyer completing the purchase of the home with a mortgage loan, even one who’s been preapproved, many things can come between you and that closing day finish line. There could be a problem with an appraisal, or a home inspection could raise questions about the condition of the home. The title search could reveal liens or encumbrances that you weren’t aware of.

This could all be resolvable, but the TIOTE clause will put pressure on all parties as the completion date approaches.

If You’re An All-Cash Buyer

All-cash buyers have a huge advantage over mortgage loan applicants when it comes to sellers in a hurry. But you should never make that check out too quickly. Even in all-cash offers, you’ll want to give yourself the amount of time necessary to fully understand the risks you’re taking on with the purchase of the property.

If you’re an all-cash buyer, you should request a home inspection – even if you didn’t include a home inspection contingency in your sales offer – to make sure you know what you’re getting into regarding necessary home repairs. Under the strict time constraints of TIOTE, you may feel pressured to assume the best even though the report reveals a problem you’d prefer to investigate more fully before deciding.

Similarly, you should always perform a title search to make sure the seller doesn’t have encumbrances, like tax or mechanic’s liens or liens due to unpaid homeowners association fees. Liens follow the property, so if you take ownership of the property without a search, you may become responsible for the seller’s debts.

Should You Agree To Make Time Of The Essence In Construction Contracts?

You can try, but inflationary pressures and supply chain issues may make a contractor unwilling to enter into such a contract unless you include generous bonuses to make it worthwhile. It won’t prevent delays, but it will incentivize your contractor to do their utmost to meet deadlines.

Are ‘Time Is Of The Essence’ Clauses Enforceable?

Yes, but the strict consequences mean that legal requirements must be met. Let’s take a look at a few of the standards of this clause.

Disclosure Of The Clause

In order for a TIOTE clause to be enforced, it has to be clear that all parties to the contract knew it was included and understood its implications. For example, you might be asked to acknowledge the clause in the contract, and you may be asked to sign a form that details your rights and responsibilities pursuant to the clause.

In other words, unlike the contracts you create when you agree to an app’s terms, or apply for a credit card, parties to contracts that include a TIOTE clause must be able to show documentation that proves your awareness and understanding.

Flexibility Around Closing Day

Parties to the contract are entitled to ask for a reasonable postponement of closing day and will need to come to an agreement with the other party on a new closing date. However, failure to request a postponement prior to closing day will put you in breach because the closing day specified in the contract is a material term, meaning it’s a crucial element of the agreement.

If you can’t be present for a timely closing day and you don’t formally request a postponement, you’ll be in breach when the specified closing date passes.

Ability To Amend A Breach

With mutual agreement, a breach can be prevented or corrected by amending the terms of the contract to avoid missed deadlines. Note that this would be unnecessary had the parties avoided including the term to begin with.

The Bottom Line: Make Sure You Understand All The Terms Of Any Real Estate Contracts You Enter

Real estate jargon, financial terms and legal considerations can seem overwhelming when you’re just starting out in the home buying process. Ask what unfamiliar terms mean or what terms mean in this context so that you understand what you’re signing. When possible, have an attorney review your contract before you sign so you’re aware of any pitfalls and are able to avoid them.

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