Many buyers, sellers and their real estate agents are unaware that a slight delay in closing escrow can cause significant liability for breach of contract damages. The standard CAR® purchase contract contains a Time is of the Esssence Clause. This means that a failure to close escrow on the exact day scheduled can constitute a breach of contract entitling the non-breaching party to damages for the delay.
In Ash vs. North American Title Company, a recent published decision (February, 2014), the buyer was purchasing the property as part of a 1031 exchange. The buyer deposited all funds necessary to close by the date provided in the contract, but the seller and the escrow company failed to close escrow on that day which was a Friday. The buyers funds had been deposited in a bank account held by LandAmerica Exchange Services, acting as the intermediary for the exchange. On the Monday after escrow was to close, the intermediary filed bankruptcy, and it took more than six months for the bankruptcy court to release the funds back to the buyer. The bankruptcy of the intermediary froze the deposits, including the buyer’s funds which had been deposited into the intermediary’s bank account.
The buyer sued the seller and the escrow company handling the sale for failing to close escrow on the Friday that was called for in the contract. As damages, the buyer claimed expenses of $140,000 incurred in the bankruptcy proceeding and tax liability of $465,000 due to the failure of the section 1031 exchange. Additionally, the buyer claimed $166,000 in income from the property if the sale had been timely completed, payments to the lender of $42,000, $189,000 paid for a new loan above what he would have paid for the original loan that was terminated by the original lender, and $28,000 of interest on a loan to meet expenses. These direct damages totaled $1,033,000.
After a trial the jury returned its verdict finding that the seller breached its contract by delaying the timely close of escrow, and was liable to the buyer for $300,000, and that the escrow company breached its contract to provide proper and timely escrow and title services and was liable for $250,000 in contract damages. The jury also found that the escrow company was liable for negligence in the amount of $500,000 and for $250,000 for breach of fiduciary duty. The jury imposed punitive damages on the escrow company in the amount of $750,000!
The seller and the escrow company both appealed. The appellate court affirmed the finding of breach of contract on the part of the seller and the escrow company but held that the amount of the damages had to be retried because the bankruptcy of the intermediary was not reasonably foreseeable by the seller or the escrow company. So a new trial will have to be held on the issue of damages.
The result in this case, however, emphasizes the potential liability a buyer or seller and/or an escrow company might have for failing to close an escrow on time.