Co-Author: Jordan Bunch, Esq.
Consider a transaction scheduled to close on Wednesday, June 30, 2010, attended by both buyer and seller. The seller signs all of the seller documents, including the deed, which is tendered to the closer for recording. The buyer signs all of her documents and tenders her down payment. Though the buyer’s loan has been approved, the wire from buyer’s lender doesn’t arrive on Wednesday, so the parties execute an escrow agreement authorizing the closer to hold the closing documents until the hoped for arrival of the lender funds on Thursday. The wire does arrive on Thursday. Did the deal close on Wednesday?
Does it make a difference if the escrow agreement provides that if the wire doesn’t arrive on Thursday, the seller gets to keep the buyer’s earnest money? What if the escrow agreement provides that if the wire is late, the contract terminates and the buyer gets her earnest money back? What if the escrow agreement doesn’t address what happens if the wire is late? What if there is no escrow agreement?
In a different example, the buyer has signed all the buyer documents, and all the funds on the buyer’s side (e.g. the earnest money, the down payment and the borrowed funds) are in the closer’s account by Wednesday. One of the two sellers has signed all the closing documents for both sellers, including the deed, which has been delivered to the closer for recording. The signing seller has authority to sign on behalf the absent seller through a power-of-attorney. The absent seller signed the power-of-attorney in Chicago and faxed a copy to the closer which she received on Wednesday morning. The closer declines, however, to disburse the seller’s proceeds to the seller, or the deed for recording, until the original power-of-attorney arrives on Thursday. Did this deal close on Wednesday or Thursday?
For the vast majority of residential real estate transactions, there are few disputes about the timing of closing. The best way to avoid the uncertainty is to unambiguously get deals closed prior to the relevant deadlines. We are not, however, in control of all of our transactions all of the time. Tardy parties might want to push the envelope. Despite the skill and best intentions of the stakeholders, there are some situations for which the precise timing of the closing is important and ambiguous.
There are no hard and fast rules about when a real estate transaction is “closed” for tax purposes. Absent delivery of a deed, a transaction is “closed” when the benefits and burdens of ownership pass from the seller to the purchaser, yet it is not always clear when this happens.
The question must be resolved by an examination of all of the facts and circumstances, no single one of which is controlling. When legal title hasn’t yet passed, courts seem to consider a half dozen or so factors, some of which are discussed below.
The court in Keith v. Commissioner held that the benefits and burdens had passed to the purchaser because the purchaser had possession of the property, the duty to pay property taxes, the duty to keep fire insurance, and the duty to maintain the property. The more concrete an agreement is, the more likely it will constitute a closed transaction. In the first example above, an escrow agreement that extends the closing date and that lets the buyer off the hook if the wire doesn’t arrive on Thursday protects the buyer’s earnest money, but it decreases the likelihood that the transaction would be considered closed by Wednesday. An escrow agreement that doesn’t extend the closing date and provides that the buyer is in default on the contract if the wire doesn’t arrive puts the buyer’s earnest money at risk, but increases the likelihood that the transaction closed on Wednesday. Buyers should rely on their attorneys, not their real estate brokers, to balance these tradeoffs.
In Dettmers v. Commissioner the court recognized that an executed escrow agreement was not enough to close a sale. The purchaser executed an escrow agreement that established “the purchase price of the property, the terms of payment, rate of interest and other terms and conditions of sale” and made a down payment on the property. The court held, however, that the benefits and burdens of ownership did not pass to the purchaser at that time. Instead the court held that the sale closed when the “agreement became fully executed with title and possession of the property passing” to the purchaser.
The second example at the beginning of this article presents a more compelling case for a Wednesday closing than the first example. In the second example, the signing seller who is the “attorney-in-fact” for the non-signing seller had actual authority to sign the deed on behalf of the non-signing seller on Wednesday. There is written evidence of this authority at the closing via the faxed copy of the power of attorney. The closer, however, waits for the original power of attorney from the seller to record together with the recording of the deed. In the first example, the buyer was a day late with his funds (perhaps due to no fault of the buyer). In the Colorado case Kaiser v. Wright, the seller could not produce statements from lien holders that they would release their liens upon their receipt of the net proceeds of the sale, however the seller produced such statements after closing. Relying in part upon “time is of the essence” language in the contract, the Colorado Supreme Court concluded that the seller failed to timely close.
If the precise timing of a closing is important to a party, he or she should strive to avoid ambiguity. If the precise timing of the closing is important and ambiguous, the parties should work with their lawyers to evaluate and manage the ambiguity.