A California court has considered whether sellers had waived their right to claim earnest money when buyer was delayed in his efforts to secure financing for the property.
On February 5, 1998, Manouchehr Galdjie ("Buyer") entered into an agreement to purchase property held in the "Barbara Kramer Darwish and David Darwish Trust" ("Trust"), of which Barbara and David Darwish ("Sellers") were the trustees. The purchase agreement required the Buyer to provide a letter from a lender stating that the Buyer was prequalified for a loan within ten days of the acceptance of the purchase contract. The purchase agreement required the Sellers to deliver to the Buyer a copy of a termite report and certain other documentation. The agreement stated that "[t]ime is of the essence" and that the agreement could not be modified except in writing by the parties. The escrow instructions in the purchase agreement stated that if the conditions for release of the escrow funds were not complied with, the escrow agent was to wait until such conditions were complied with unless one of the parties made a written demand for cancellation of the escrow and the distribution of the escrowed funds.
On April 1st, the Buyer was still attempting to obtain a prequalification letter. As part of the process, one of the Sellers had faxed him some additional documents, on which she wrote that April 9th was the date that "everything should be wrapped up". On May 11th, the Sellers sent a letter to the escrow agent requesting that the escrow be closed and the funds distributed because the Buyer had failed to arrange financing within the required time period. On May 12th, the Buyer obtained a prequalification letter from a lender. When the Sellers refused to proceed with the transaction, the Buyer brought a lawsuit for specific performance of the purchase agreement. The trial court ruled in favor of the Buyer and the Sellers appealed.
The California Court of Appeal, Second Division, affirmed the trial court. The Sellers raised two arguments on appeal. First, the Sellers argued that they had not waived their ability to demand the Buyer's compliance with the terms of the escrow agreement. Second, the Sellers argued that the Buyer's lawsuit improperly sought relief from the Sellers rather than the Trust, and so the trial court had entered judgment against the wrong party.
The court first considered whether a waiver had taken place. The trial court had found that the Sellers had not declared the Buyer in default of his contractual obligation to obtain a prequalification letter prior to May 11th and the parties had been in constant communication up to that date, with the Sellers encouraging the Buyer to continue to try to obtain the prequalification letter. The trial court had also found that the Buyer had requested on a number of occasions from the Sellers a copy of the termite report but the Sellers had failed to turn over this document.
Looking at California law, the court found that the general rule is that the terms of the contract will be enforced and a buyer's failure to act in a timely fashion when the contract states "time is of the essence" will usually allow a seller to terminate the purchase agreement and claim the earnest money. However, a party can waive any contractual term which is to their benefit. The court found that the trial court's factual findings supported the conclusion that the Sellers had waived their ability to enforce the financing provisions in the purchase contract. Therefore, the court affirmed the trial court's ruling that the Buyer was entitled to specific performance of the purchase contract.
Next, the Sellers challenged the judgment entered against them in this case, arguing that they were improperly named as defendants in the Buyer's lawsuit. The property was owned by the Trust, and so the Sellers argued that the Trust was the only entity which could fulfill the relief sought by the Buyer in his lawsuit. The court reviewed the relevant law, and found that trustees like the Sellers could be named in lawsuits where the lawsuit was the result of some action taken by the trustee. Here, the Sellers were the trustees and had the power to cause the Trust to sell the property owned by the Trust. Thus, the court found that the trial court had not erred entering judgment against the Sellers and ordering them to complete the sale of the home to the Buyer. Thus, the trial court was affirmed.
Galdjie v. Darwish, 7 Cal. Rptr. 3d 178 (Cal. Ct. App. 2003).