What is the Importance of the Demand to Close?

What is the Importance of the Demand to Close?

By: D. Keith Dunnagan, Esq.

August 24, 2021

In a real estate market like we have been experiencing for the last 18 plus months, the demand to close may just be one of the most important documents in a real estate transaction for a buyer. Certainly, getting a property under contract is important, but once that property is under contract, how does one insure that the transaction actually closes? More importantly, how does the buyer or seller preserve their rights under the RPA if the transaction does not timely close?

We have seen several of these instances where the seller did not timely close or a buyer failed to timely close. The question is what happens next?

Under the law you would generally look at who caused the breach. That is, which parties failure to perform prevented the transaction from closing. But real estate transactions are unique, in that to complete the transaction it requires the seller to sign a deed transferring title to the buyer and the buyer must tender the funds for payment. Both require a bit a faith that the other will perform.

However, what often happens is that neither party shows up and performs their obligations. Naturally, that leads to finger-pointing by both parties. Seller says that because the buyer did not tender funds to close escrow that they (the Seller) did not sign the deed to transfer title. Buyer says just the opposite, because Seller did not sign and place the deed with escrow that they did not tender funds sufficient to close escrow with the escrow office. It is the quintessential chicken and the egg and what comes next is a parade of demands from the Seller demanding release of the deposit as liquidated damages and the buyer demanding performance. The question is ultimately, who is right.

Without the use of the demand to close escrow and in a scenario when neither party performed, that answer is that neither party is correct. In Pittman v. Canham (1992) the appellate court succinctly stated that: “The failure of both parties to perform concurrent conditions during the time for performance results in a discharge of both parties’ duty to perform. Thus, where the parties have made time the essences of the contract, at the expiration of time without tender by either party, both parties are discharged.” (Citations omitted).

So what does this mean – concurrent conditions exist when both parties are obligated to do something at the same time to complete a contract. The way this plays out in real estate is with a contract that requires seller to deposit an executed deed to close and requires the buyer to deposit funds to close escrow. Both have to happen at roughly the same time for the transaction to be completed.

This is different from a condition precedent which requires one act to occur prior to another act. We don’t think about it often, but we enter condition precedent contracts every day. I want my double double cheeseburger meal from In-N-Out. To get my meal, I must first pay the cost of the meal. After paying the cost of the meal I then receive the meal. Or, I hire a contractor to do work on my house. Contractor does the work on the house and then I pay for the work. Service contracts and retail contracts are loaded with conditions precedent. Or, I want to purchase gas for my car, I swipe my card and then the pump turns on for me to fill the tank with gas. These transactions fundamentally boil down to “if you do this, I will do that.” But that is not how real estate transactions work. In real estate the performance of obligations is nearly simultaneous.

The proposition that Pittman stands for is that if parties fail to timely perform then both parties are relieved from performance. The question is then – how does one preserve their rights under the contract without actually performing? The answer lies in the use of the demand to close escrow. This one page document that is often not understood is the key. This document tells the other side that the sender is ready, able, and willing to perform the obligations under the contract and that the receiving party is demanded to perform. Once sent, it acts as the mechanism to confirm the sending party’s notice of willingness to perform and solves the predicament presented in Pittman.

As the court noted in Pittman buyers are reluctant to put money into escrow without assurance of performance as the buyers funds will be tied up. This reluctance naturally leads to both buyer and seller saying to the other “No, you first” (Citation omitted). When this happens, the court recognizes that ultimately it is the buyer that loses because the obligation to perform lapses. The demand to close is the great equalizer because it places performance requirements on the receiving party.

The demand to close ultimately preserves the right of the buyer to pursue its specific performance case and makes the pursuit of such matter a little more clear (for sake of clarity, the right to pursue a specific performance case is not lost because of the lack of the demand to close escrow, the analysis changes related to the relative obligations). For the seller the demand preserves the seller’s right to pursue release of the deposit as liquidated damages. The document is beneficial to both.

With the current market, the best practice to ensure the ability to pursue breach claims is to make sure that the demand to close is timely delivered to preserve the rights of the buyer or seller.

The information presented in this article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.

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