Is "Time is of the Essence" Enforceable?

In the recent decision in Magic Carpet Ride LLC v. Rugger Investment Group, LLC, the California Court of Appeal clarified the application of the very common contractual provision "Time is of the essence."

Defendant Rugger Investment Group LLC (Rugger) entered into a contract to sell an airplane to Plaintiffs Magic Carpet Ride, LLC (MCR) and Kevin T. Jennings. Rugger deposited a lien release into escrow eight days after the expiration of a 90-day period in which it was required to make the deposit. 

The trial court found Rugger could not claim substantial performance because it had violated the plain language of the contract. For that reason, the court granted the motion of MCR and Jennings for summary adjudication of their breach of contract cause of action and for summary adjudication of Rugger’s rescission and breach of contract causes of action. 

The Court of Appeal reversed and remanded the case back to the trial court, ruling that whether Rugger substantially performed its contract obligations is a triable issue of material fact that defeats summary adjudication. 

It held that a provision in the parties’ contract making time of the essence does not automatically make Rugger’s untimely performance a breach of contract because there are triable issues regarding the scope of that provision, and whether its enforcement would result in a forfeiture to Rugger and a windfall to MCR. 

In 2015, Jennings and Rugger entered into a purchase and sale agreement (the Agreement) by which Jennings agreed to purchase from Rugger an aircraft for $610,000. Paragraph 6.14 of the Agreement states: “Unless specifically stated to the contrary herein, time shall be of the essence for all events contemplated hereunder.” 

Paragraph 2.6 of the Agreement required Rugger to transfer the Aircraft on the closing date free and clear of all liens and encumbrances. Rugger was not able to comply with this requirement due to a mechanic’s lien filed against the Aircraft. 

As a consequence, MCR and Rugger entered into an amendment to the that gave Rugger 90 days from the date of closing in which to provide one of three means of releasing the Cutter lien, including, “Lien Release fully executed by Cutter . . . in original form delivered to Escrow Agent, recognized and accepted by the FAA [Federal Aviation Administration ].” Rugger agreed to hold back $90,000 with escrow for a period of 90 days. 

Paragraph 3a. of the Amendment stated that if Rugger can obtain a lien release by any one of the three ways within the 90-day term, then the entire amount of the holdback would be released to Rugger on the 90th day. The Amendment stated that if Rugger cannot obtain a lien release by any one of the three ways identified in paragraph 2 within the 90-day term, then Rugger agreed to release entire amount of holdback to Buyer at the expiration of the 90-day term. 

Rugger did not obtain a lien release within the 90 days, and instead, Rugger obtained a lien release from Cutter eight days after the expiration of the 90-day period, and delivered the lien release to escrow. The lien release was on an FAA form entitled “Notice of Recordation—Aircraft Security Conveyance.” Rugger asked that $38,000 be released to it from escrow to cover the amount that Rugger’s managing member had paid to Cutter to get the lien released. Jennings did not agree to that request.

Jennings filed a complaint against Rugger for breach of contract and breach of the implied covenant of good faith and fair dealing alleging Rugger breached the Amendment by failing to obtain a release of the Cutter lien within the requisite 90-day time period and by refusing to release the $90,000 holdback. 

The issue for the summary judgment motion was which party breached the Amendment—Rugger, by not timely obtaining a lien release and depositing it into escrow, or MCR, by not allowing the $90,000 holdback to be released from escrow to Rugger. 

The trial court found that Rugger breached and as Rugger’s conduct violates the plain language of the Agreement, substantial compliance cannot be shown. Rugger argued it substantially performed because its delay of only eight days in depositing the lien release into escrow was immaterial. MCR and Jennings argue Rugger’s delay was a material breach because the Agreement and the Amendment required strict compliance. 

A. Delayed Performance as Substantial Performance

Substantial performance is sufficient, and justifies an action on the contract, although the other party is entitled to a reduction in the amount called for by the contract, to compensate for the defects. 

What constitutes substantial performance is a question of fact, but it is essential that there be no wilful departure from the terms of the contract, and that the defects be such as may be easily remedied or compensated, so that the promisee may get practically what the contract calls for.

The doctrine of substantial performance also applies when a party performs but misses a deadline.  Where time is not of the essence of a contract, payment made within a reasonable time after the due date stated in the contract constitutes compliance therewith. 

A substantial compliance meets the requirements of any obligation.

The evidence submitted in connection with the summary adjudication motion showed that Rugger did not willfully depart from the terms of the contract but diligently sought to obtain a lien release from Cutter. But Cutter resisted, and as a consequence Rugger was not able to deposit the lien release into escrow until eight days after the expiration of the 90-day period. MCR received what it contracted for—an aircraft free and clear of liens and encumbrances—the lien release just came eight days late.  

MCR and Jennings presented no evidence of damages caused by Rugger’s eight-day delay in depositing the lien release into escrow. 

The Restatement Second of Contracts analyzes substantial performance as a category of failure to render performance (Rest.2d Contracts, § 237, com. d., p. 220) and identifies five factors to consider in determining whether a failure to perform is material. 

Those factors are: (1) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (2) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (3) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (4) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; and (5) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.  

The evidence showed that MCR and Jennings, the allegedly injured parties, received what they bargained for (an aircraft free and clear of liens and encumbrances), any damage suffered by MCR and Jennings due to the eight-day delay can be compensated, Rugger did in fact cure its failure to perform, and Rugger’s behavior comported with standards of good faith and fair dealing. 

B. Effect of the Time Is of the Essence Provision in the Agreement

The Agreement had a time is of the essence provision in Paragraph 6.14 that states: “Unless specifically stated to the contrary herein, time shall be of the essence for all events contemplated hereunder.” 

A leading treatise explains: “Merely putting into the contract the words ‘time is of the essence of this contract’ may be effective for the purpose, because the context may make clear what the intention is and what the expression means. 

What the court must know, however, in order to give effect to such a cryptic provision, is: What performance at what time is a condition of what party’s duty to do what?  In some cases, the answer to this question is simple and obvious. Often, however, it is not clear whether the provision is meant to limit the duties of both parties, or to limit the duty of one and not the other.

MCR took title to and possession of the Aircraft the day after the Amendment was signed; therefore, it was not clear the parties intended time to be of the essence with respect to Rugger’s obligation under the Amendment to provide clear title within the 90- day period. 

The traditional rule on the legal effect of a time is of the essence provision is that when time is made of the essence of a contract, a failure to perform within the time specified is a material breach of the contract. 

Where a purchaser of land has failed to make payment of the purchase price within the time specified and time is of the essence of the sale agreement, equity follows the law and does not disregard such provisions, but holds the buyer strictly to his obligation.

The traditional rule has been tempered so that including a time is of the essence provision in a contract does not always make untimely performance a breach. Courts have recognized that the inclusion of language such as ‘time is of the essence’ does not necessarily require a court to conclude that the buyer’s rights would be so strictly limited. 

A time is of the essence provision will not be enforced if doing so would work a forfeiture.  California courts generally dostrictly enforce time deadlines in real estate sales contracts, permitting the seller to cancel after the time specified where time is specifically made of the essence unless there has been a waiver or potential forfeiture.

In one case, a contract for the sale of a duplex made time of the essence; however, the court held the buyer’s delay in depositing the balance of the purchase price did not give the sellers the right to terminate the contract. The court concluded an unqualified rule enforcing time is of the essence provisions and permitting default is at odds with prior and subsequent developments in California law. 

Another case dealt with an installment land sale contract in which time was declared to be of the essence. The buyer made payments for over ten years and then stopped.  The seller terminated the buyer’s rights under the contract and sued to quiet title. The buyer then offered to pay the entire balance with interest and sought specific performance of the contract.  The California Supreme Court held “the anti-forfeiture policy justifies awarding even wilfully defaulting vendees specific performance in proper cases. When the default has not been serious and the vendee is willing and able to continue with his performance of the contract, the vendor suffers no damage by allowing the vendee to do so. In this situation, if there has been substantial part performance or if the vendee has made substantial improvements in reliance on his contract, permitting the vendor to terminate the vendee’s rights under the contract and keep the installments that have been paid can result only in the harshest sort of forfeitures. 

In sum, an express provision can make time of the essence. If the enforcement of an express provision causes an excessive penalty or an unjust forfeiture, equity will prevent enforcement. Thus equity limits the power to determine our own contractual rights and duties.

Rugger expended $38,000 to get the lien released. If strict compliance were required, and the $90,000 holdback released to MCR, then Rugger would lose not only the $90,000 holdback, in effect a price reduction, but it would not receive any compensation for the $38,000 it had to pay Cutter to get the lien released. 

MCR, which had possession of the Aircraft since the closing date would receive an aircraft free of liens and encumbrances and a $90,000 reduction in price. The Amendment contemplated MCR would get the Aircraft free and clear of liens and encumbrances or a $90,000 price reduction by means of the holdback, but not both. 

Because there was no evidence that MCR and Jennings suffered damages caused by the eight-day delay in depositing the lien release into escrow, those facts raised triable issues whether enforcement of paragraph 6.14 would result in an unjust forfeiture to Rugger and a windfall for MCR. 

LESSONS:

1.         California courts generally do strictly enforce time deadlines in real estate sales contracts.

2.         However, if the enforcement of an express provision causes an excessive penalty or an unjust forfeiture, equity will prevent enforcement.

3.         The anti-forfeiture policy justifies awarding even wilfully defaulting vendees specific performance in proper cases.

An ADU May Assist Sale of Single Family Residence

Some homebuyers struggle financially to purchase a home, and the ability to construct an Accessory Dwelling Unit ("ADU") may provide them an incentive to purchase the property because it can provide a source of rental income that can assist in the mortgage payment.

An ADU is an attached or a detached residential dwelling unit that provides complete independent living facilities for one or more persons.  It needs to include permanent provisions for living, sleeping, eating, cooking, and sanitation on the same parcel as the single-family residence ("SFR") is situated.  ADUs include efficiency units as defined in California Health and Safety Code section 17958.1, manufactured homes as defined in section 18007, and Movable Tiny Houses.

An ADU is allowed up to a maximum of 1,200 square feet, and detached ADUs cannot be greater than two stories.  Attached ADUs may not result in an increase in total floor area exceeding 50% of existing or proposed living area of the primary structure.  For this purpose, living area means interior habitable area of a dwelling unit including basements and attics but does not include a garage or any accessory structure.

The purpose of the Los Angeles proposed ADU Ordinance dated November 29, 2018 is to provide for the creation of ADUs in a manner consistent with California's Government Code section 65852.2 that became effective on January 1, 2017.

Except where specifically prohibited, an ADU is permitted in all zones where residential uses are permitted by right.  Only one ADU is permitted per lot that contains an existing SFR or where a new SFR is proposed.  The ADU must follow the same building code and residential code requirements as the existing or proposed SFR.

ADUs may be rented out, but cannot be sold separate from the existing or proposed SFR on the same lot.  Movable Tine Houses may be sold when removed from the lot.  

No passageway for the ADU, nor space between buildings, is required.  No additional setbacks are required for a lawfully existing garage or space above or abutting a garage that are converted to an ADU or portion of an ADU.  This facilitates the conversion of a garage into a ADU that can be rented by the owners of the SFR, and thereby provide income that can be used to pay the mortgage, taxes, and insurance for the SFR.  

An important requirement for the ADU is one parking space is required per ADU. However, no parking is required if the SFR is located within one-half mile of a public transportation stop along a prescribed route according to a fixed schedule, or within one block of a car share parking spot, or located in an architecturally and historically significant district.  Parking is allowed in setback areas, except in required front yards when parking must be located on an existing driveway.  Parking may be provides in tandem parking.

When a garage, carport, or covered parking structure is demolished in conjunction with the construction of an ADU or converted to an ADU, any lost off street parking spaces must be replaced. 

Conversions of lawfully pre-existing space is allowed if the ADU has an independent exterior access from the existing residence.   An ADU cannot be built between the front of the primary residence and the street.

Because the Los Angeles Rent Stabilization Ordinance provisions apply to properties with 2 or more single-family dwelling units on the same lot, it does not apply to dwelling units created after October 1, 1978 and to owner-occupied dwelling units.  However, these exemptions will normally exclude a newly created ADU.

LESSONS:

1          An ADU provides incentive to purchase because it can be a source of income that can be used to offset mortgage, taxes, and insurance payments.

2.         At lease one parking space is required, including tandem parking, unless the lot is within a certain distance of scheduled transportation, such as buses or rail.

Different Easements Have Different Elements

In the recent case of Ranch at the Falls v. O'Neal, the Court of Appeal reviewed a judgment in favor of a plaintiff who sought to quiet title to two claimed easements within residential gated communities in which plaintiff had no ownership interest. 

The judgment found plaintiff was entitled to an express easement (or in the alternative a prescriptive easement) and an equitable easement over all the private streets in a gated community (Indian Springs) in Chatsworth, and likewise was entitled to an express (or in the alternative, prescriptive) and equitable easements over a homeowner’s lot (the Lenope property) in an adjacent gated community (Indian Oaks). 

Together, the two claimed easements provided access, from the west, to the plaintiff’s ranch, which she or her lessee used to stable horses owned by them and by members of the public. Ranch operations required deliveries of supplies in large trucks, removal of manure, visits by veterinarians, and access by members of the public to ride or visit their horses. 

Plaintiff also had access to her ranch by a different route (from the east) that included an undisputed right to travel over one now-private street (Iverson Road) in Indian Springs and other now-private streets in a third gated community (Indian Falls). 

Plaintiff found this route to her ranch unacceptable because, after passing through Indian Springs and Indian Falls, the route requires use of an old and narrow bridge on Fern Ann Falls Road that she considers dangerous. This bridge is on private property, but not on property that is part of any of the three gated communities. 

The Court of Appeal concluded the trial court erred on several points.

First, the court found the individual homeowners in Indian Springs, who owned the private streets abutting their lots to the mid-line (subject to reciprocal easements with other homeowners), were not indispensable parties to plaintiff’s lawsuit, but nonetheless were bound by the judgment. This was found to be clear error. 

Second, the court erred when it found an express easement over all the private streets of Indian Springs. The declaration of easement plainly shows on its appended map the exact route of the easement, over only one private street (Iverson Road) in Indian Springs, and then over the private streets of Indian Falls. 

Third, the judgment provides an express easement “or, alternatively, a prescriptive easement,” but the court’s statement of decision did not mention or discuss a prescriptive easement.  Plaintiff did not establish the requirements for a prescriptive easement over the private streets of Indian Springs, or over the Lenope property. 

Fourth, the court failed to make the necessary findings to support an equitable easement, and the record did not contain evidence to support the factors that are necessary to impose an equitable easement over the private streets of Indian Springs, or over the Lenope property. 

Fifth, while a recorded easement exists over the Lenope property (granted by plaintiff when she owned the Lenope property), the easement by its terms does not benefit plaintiff’s ranch, and instead benefits a third property that plaintiff no longer owns. In any event, plaintiff cannot use that easement because it cannot be reached except through the private streets of Indian Springs, to which plaintiff has no right of access. 

The Appellate Court ruled that the Indian Springs homeowners should have been joined as parties, as required under the quiet title statutes. (Code of Civil Procedure § 762.010 - “The plaintiff shall name as defendants in the action the persons having adverse claims to the title of the plaintiff against which a determination is sought".)

A quiet title judgment cannot be entered in the absence of all parties with an interest in the property at issue. A person is an indispensable party to litigation if his or her rights must necessarily be affected by the judgment. 

The judgment entered by the trial court stated that “any third party individual homeowners who are affiliated in any way with Defendants [Indian Springs and Indian Oaks HOAs] are bound by this judgment.” That cannot be the case unless the owners of the private streets were parties, or unless, as a matter of law, Indian Springs HOA had the authority to bind its members to the grant of an easement over the streets owned by the members. 

The easement declaration unambiguously states it is confined to the private streets depicted on the map attached to the declaration. There is no getting around the fact that the private streets depicted on the map are only Iverson Road and the private streets in Indian Falls. So, even if Indian Springs HOA were the owner of all the private streets in Indian Springs (and it is not), it did not grant plaintiff an easement over all those streets. 

Where, the “written language of the easement” specifically uses the map to show the easement route. It has long been the law in California that plat maps may be used to precisely define an easement, and when an easement is defined by a map, it is decisive.  

Because the third party movants were, as they contended, necessary parties to plaintiff’s quiet title action, the judgment against the individual homeowners could not stand. And even if it could, the trial court’s grant of an express easement over the private streets of Indian Springs was erroneous, as the express easement is confined to the portions of Iverson Road depicted on the map.

As has been mentioned, plaintiff alleged a prescriptive easement “in the alternative” to her claims of an express easement.

A prescriptive easement requires use of the property that has been open, notorious, continuous and adverse for an uninterrupted period of five years.

The statement of decision does not discuss the elements of a prescriptive easement, or even mention the term “prescriptive easement".  The fact that a user claims a right to use the property adversely to the rights of the owner of the servient tenement must be communicated to the property owner, or the use of a claimed easement must be so obviously exercised as to constitute implied notice of the adverse claim; the owner must have notice that unless some action is taken to prevent the use it may ripen into a prescriptive easement.

Prescription cannot be gained if the use is permissive.  The existence of a prescriptive easement must be shown by a definite and certain line of travel for the statutory period. 

There are three requirements for an equitable easement, described in terms of the landowner and the trespasser. Judicial creation of an easement over a landowner’s property is permissible provided that the trespasser shows that (1) her trespass was ‘ “innocent” ’ rather than ‘ “willful or negligent",(2) the public or the property owner will not be irreparably injured by the easement, and (3) the hardship to the trespasser from having to cease the trespass is greatly disproportionate to the hardship caused the owner by the continuance of the encroachment.

Unless all three prerequisites are established, a court lacks the discretion to grant an equitable easement. Courts resolve all doubts against their issuance.

It is fundamental that the language of a grant of an easement determines the scope of the easement. Grants are to be interpreted like contracts in general. 

Because there are no enforceable easements over the private streets of Indian Springs (except over Iverson Road), or over the Lenope roadway (except in favor of the Friese property), there was no basis for an award of damages or an injunction against any of the defendants, and no basis for the award of attorney fees. Plaintiff’s claims for nuisance, declaratory relief, and intentional interference with contractual relations failed along with her easement claims. 

LESSONS:

1.      A quiet title issue requires all parties with an interest in the property at issue to be named as defendants.

2.      The different types of easements have different necessary elements to prove a cause of action.

3.      If the written language of the express easement specifically uses a map to show the easement route, the map is decisive. 

4.      Prescriptive easements require use of the property that has been open, notorious, continuous and adverse for an uninterrupted period of five years.

5.      Equitable easements require (1) a trespass that was ‘ “innocent” ’ rather than ‘ “willful or negligent", (2) the public or the property owner will not be irreparably injured by the easement, and (3) the hardship to the trespasser from having to cease the trespass is greatly disproportionate to the hardship caused the owner by the continuance of the encroachment.

Salespersons Need to Avoid Tortious Interference with Contracts

In the recent case of Jenni Rivera Enterprises v. Univision Communications, the California Court of Appeal clarified the elements of the tort for tortious interference with contractual relations.

Because listing agreements, buyer representation agreements, and purchase agreements are contracts that can be part of any standard sales transaction, prudent salespersons need to be aware of their obligation to avoid interfering with such contracts.

The appeal in Jennie Rivera Enterprises resulted from a dispute concerning a television production based on the life of the Mexican-American celebrity Jenni Rivera, who died in a plane crash in December 2012. The entity that controlled most of Rivera’s assets, Jenni Rivera Enterprises, LLC (JRE), entered into a nondisclosure agreement ("NDA") with Rivera’s former manager, Pete Salgado ("Salgado"), that restricted his disclosure and use of certain personal information about Rivera and her family. 

Alleging Salgado breached that agreement by disclosing information to the producers and the broadcaster of a television series based on Rivera’s life, JRE sued Salgado and the program’s producers for breach of contract, interference with contract, and inducing breach of contract. JRE also sued the program’s broadcaster for interference with contract and inducing breach of contract. 

The Appellate Court concluded that JRE satisfied its burden to demonstrate a prima facie case, with reasonable inferences from admissible evidence, that the producers had knowledge of the NDA before taking actions substantially certain to induce Salgado to breach the agreement. 

The elements of a cause of action for intentional interference with contractual relations are:

(1) the existence of a valid contract between the plaintiff and a third party; 

(2) the defendant’s knowledge of that contract; 

(3) the defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; 

(4) actual breach or disruption of the contractual relationship; and 

(5) resulting damage.

The defendant’s conduct need not be wrongful apart from the interference with the contract.  Furthermore, a plaintiff need not establish that the primary purpose of the defendant’s actions was to disrupt the contract. The tort is shown even where the actor does not act for the purpose of interfering with the contract or desire it, but knows that the interference is certain or substantially certain to occur as a result of his or her action.

The tort of inducing breach of contract requires proof of a breach, whereas the tort of interference with contractual relations requires only proof of interference.

1.         Valid Contract

JRE alleged the NDA between JRE and Salgado precluded Salgado from disclosing or using certain confidential information about Rivera. The trial court found JRE made a prima facie showing the agreement was valid and enforceable. 

2.         Knowledge of the Nondisclosure Agreement

To recover damages for inducing a breach of contract, the plaintiff need not establish that the defendant had full knowledge of the contract’s terms, but the defendant must have knowledge of the contract with which the defendant is interfering, and of the fact that the defendant is interfering with the performance of the contract.  

Knowledge of a contractual relationship is sufficient to show knowledge for the tort of inducing breach of contract.

JRE provided evidence the Producers knew of the NDA when JRE sent a cease and desist letter attaching the agreement. In addition, JRE submitted evidence the Producers knew of the NDA and its likely authenticity before or very soon after production of the Series. 

The NDA imposed a continuing obligation on Salgado not to disclose or use confidential information about Rivera without JRE’s consent. The Appellate Court ruled that JRE could state a cause of action based on Salgado’s continuing obligations under the agreement and his breaches of discrete obligations at different times. 

4.         Actual Breach or Disruption of the Contract 

The trial court recognized the Producers appeared to concede that, if they knew of the NDA when they signed the Co-producers Agreement, they could potentially face liability for the cause of action of intentional interference of the NDA.

The trial court found that Salgado undoubtedly made additional disclosures of the same information to others during the production of the Series, and Salgado undoubtedly “used” protected information without JRE’s authorization. 

Given the breadth of the NDA’s restrictions on Salgado’s use and disclosure of protected information, it was a reasonable inference of the trial court from the admissible evidence that Salgado breached the agreement after the Producers had knowledge of it. 

5.         Resulting Damage - Causation 

Determining whether a defendant’s misconduct was the cause in fact of a plaintiff’s injury involves essentially the same inquiry in both contract and tort cases. 

The test for causation in a breach of contract action is whether the breach was a substantial factor in causing the damages. 

Similarly, in tort cases, California has definitively adopted the substantial factor test for cause-in-fact determinations.  Under that standard, a cause in fact is something that is a substantial factor in bringing about the injury. 

The term ‘substantial factor’ has not been judicially defined with specificity, and indeed it has been observed that it is neither possible nor desirable to reduce it to any lower terms.  A force which plays only an ‘infinitesimal’ or ‘theoretical’ part in bringing about injury, damage, or loss is not a substantial factor. Undue emphasis should not be placed on the term ‘substantial. Further, a substantial factor need not be the only factor contributing to the plaintiff’s alleged harm.  

Causation is ordinarily a question of fact that may be decided as a question of law where the undisputed facts permit only one reasonable conclusion. 

The evidence in the record suggested the Producers agreed to many of the “enticements” to Salgado before they knew about the NDA. But once they knew of the agreement, the Producers’ continued payments to Salgado were a substantial factor in bringing about Salgado’s continued breaches. 

6.         Damages

JRE alleged the Producers’ interference with the NDA negatively affected the value of the information protected by the agreement and the ability of JRE to use the information for its purposes. JRE further alleged the Producers’ interference limited JRE’s economic opportunities to publish a book or produce or sell a television show or series about Rivera containing the information.   This was sufficient to state a cause of action.

LESSONS:

1.         Interfering with the contractual relations between other parties (e.g., a listing agreement between seller and a salesperson) can expose the offending salesperson to a lawsuit for intentional interference with contractual relations.

2.         Salespersons should always be alert to the contractual relations between other parties, and should be very careful before interacting with one of the parties in a manner that may cause that party to breach a contract.