Drafting An addendum Extending The Close Of Escrow: Some Opportunities/Issues To Consider
By David Hamerslough
May 12, 2021
The overwhelming majority of addenda extending the close of escrow usually state “Close of escrow extended to [specified date].” Short and to the point, this language addresses the most important objective of the parties – establishing a new date for closing the escrow. Generally, the sole consideration for this type of addendum is each party’s willingness and promise to extend the close. As long as each party performs its contractual obligations, any potential issue with this language or the expectations of the parties does not manifest itself and lawyers do not get involved.
However, what happens when escrow does not close on the date specified in that extension addendum? Questions must then be asked (usually by the parties’ attorneys), including but not limited to the following: (1) who asked for the extension; (2) why was the extension needed by that party; (3) what are the facts and circumstances that lead the other party to agree to that extension; (4) had each party met all of their contractual obligations up to that point; (5) what was the consideration for the extension; (6) what were the expectations of the parties in the event that escrow did not close as agreed; (7) how were those expectations addressed (or how should they have been addressed); (8) what is the impact on each party resulting from escrow not closing as agreed; (9) were any of these questions/issues considered by the parties or their agents (and, if so, why weren’t they addressed in the addendum); (10) what options now exist in view of the foregoing; and (11) what are the rights, duties and obligations of the parties at this point in time?
Drafting an addendum extending the close of escrow presents the opportunity to address some or all of these questions/issues if the parties choose to do so. The parties may want to determine, in advance, what is to happen if the new closing date does not work. Depending upon the facts and circumstances, as well as the motivations of the parties, there may be instances where one or both of the parties do not or should not take advantage of this opportunity to detail all that has occurred in the transaction and why the extension of time is being agreed to by the parties. On the other hand, there may be instances where the opportunity to address these questions/issues might be beneficial to at least one of the parties.
The following are some of the opportunities that may be presented when an extension is requested by one or both parties:
- The parties have the opportunity to recite in the addendum how and why the parties reached this point in the transaction and specify who has and who has not performed any contractual obligations in a timely fashion (and why). Including this information eliminates any future uncertainty and/or argument about the history of the transaction;
- If the recital of these facts and circumstances indicates that only one party needs the extension, then adding language that the other party has met its contractual obligations and is otherwise ready, willing, and able to close also eliminates any future uncertainty and/or argument about this issue;
- Is it appropriate for a party requesting an extension to pay separate and new consideration for that extension? Separate and new consideration does not mean releasing all or a portion of the deposit in the event that the buyer is requesting the extension – preserving that deposit in the event that there is a breach by the buyer is beneficial to the seller and also avoids any claim that there was an illegal non-refundable deposit;
- What does each party expect will happen in the event escrow does not close on the new date? For example, does the seller expect that the buyer will forfeit their deposit and sign a cancellation/release of the contract? Does the buyer expect to get their deposit returned or have additional time to close?
- Can an agreement be negotiated and memorialized in the extension addendum regarding the rights and obligations of the parties in the event that escrow does not close?
- Can a release of liability, including a Civil Code § 1542 waiver, be drafted and signed in advance, not to take effect unless and until the escrow does not close on the extended date?
- What is the impact of the extension on the buyer’s interest rate lock, funding, cost of redrawing loan documents, housing arrangements, carrying costs, storage costs, etc. and/or any of these or other issues on a subsequent purchase by the seller?
- What is the impact on any other contractual obligations, such as repairs, walk-through inspections, etc.?
- Can any of these issues be avoided by closing with the seller retaining possession for an agreed-upon period of time? If so, terms and conditions need to be in a separate Agreement regarding the seller retaining possession?
- All of these above issues will arise if the original extension of time turns out to be insufficient. Will more time be extended, and, if so, on what terms and conditions?
- Finally, will any additional Notices to Perform or Demands to Close Escrow be required (the latter being required if the C.A.R. contract is being used)? Alternatively, if the PRDS contract is being used, will any further tender of performance by either party be necessary?
These opportunities/issues need to be considered and negotiated before the extension addendum is created. Which of these opportunities a party may choose to include in the extension addendum will depend on a number of practical and legal factors, along with the party’s motivations. Agents should carefully document their files that these issues have been discussed with their clients; this is a good risk management technique if the clients choose not to follow the agent’s advice.
If any of the parties has a question about any of these opportunities/issues, including but not limited to whether or not to detail the history of the transaction in the extension addendum, how that history is worded if it is provided, and the effect of any further delays, they should promptly consult with a qualified California real estate attorney before signing an extension addendum.