Does Missing an Escrow Deadline Automatically Mean You Lose the Escrow Funds?

Post-closing escrow arrangements are common in residential real estate transactions throughout Westchester County and New York City. Buyers often insist on retaining a portion of the purchase price in escrow until open permits are closed, certificates of occupancy are obtained, or other property-related issues are resolved. These agreements are intended to protect buyers while giving sellers an opportunity to complete outstanding work after closing.

A recent Westchester County Supreme Court decision, 22 Tomahawk Drive LLC v. Hiser-Chason (Sup. Ct. Westchester County, May 7, 2026), illustrates an important principle that can sometimes override strict contractual deadlines: the doctrine of substantial performance.

The Escrow Agreement

The dispute arose following the sale of a residence in Harrison, New York. At closing, the parties entered into an escrow agreement under which $100,000 of the seller's proceeds would be held in escrow pending the closure of certain open building permits and the issuance of certificates of occupancy or completion. The agreement provided a July 12, 2025 deadline and contained an additional provision allowing the seller until August 12, 2025 if the work had been completed before July 12 but the certificates had not yet been issued.

By July 9, 2025, two of the outstanding permits had been closed. An inspection identified two remaining issues: an opening in a garage ceiling and overgrown grass. Those items were subsequently corrected by July 17, and the municipality issued the certificate of occupancy on July 24, 2025.

The buyers nevertheless demanded the escrow funds, arguing that the contractual conditions (i.e. completion of all work) had not been satisfied by July 12, 2025. The seller commenced litigation seeking release of the escrow funds.

The Buyers' Position: A Deadline Is a Deadline

The buyers argued that the escrow agreement was unambiguous. According to their reading, if all work was not completed by July 12, 2025, the escrow funds automatically belonged to them. Because work was not completed until July 17, 2025, they claimed entitlement to the entire $100,000 escrow.

This position reflects a familiar principle of contract law. New York courts frequently enforce contractual conditions and deadlines as written. Parties are generally expected to comply with the precise language they negotiated.

The Court Applies Substantial Performance

The court rejected the buyers' interpretation and instead focused on whether the seller had substantially performed its obligations under the escrow agreement. The court noted that:

• Two of the three permits had been resolved before the contractual deadline.

• The remaining deficiencies were minor and were corrected shortly thereafter.

• The certificate of occupancy was issued within the overall extension period contemplated by the agreement.

• The buyers suffered no demonstrated prejudice from the brief delay.

  
  

The court characterized the remaining deficiencies as de minimis and concluded that the seller's performance was sufficiently complete to satisfy the contract. Allowing the buyers to retain the entire $100,000 escrow under those circumstances would have resulted in a disproportionate forfeiture. As a result, the court ordered the escrow funds released to the seller and awarded prejudgment interest (ouch!) running from the date the certificates were ultimately issued.

Why the Decision Matters

The case serves as a reminder that courts are often reluctant to impose a forfeiture where the primary objectives of an agreement have been achieved and any deviation from strict compliance is minimal. That does not mean deadlines are unimportant. In many cases, New York courts will enforce them exactly as written. But where a party has substantially completed the required work, the remaining deficiencies are insignificant, and the other party has not suffered any meaningful harm, equitable principles may prevent forfeiture.

The case highlights the importance of carefully drafting escrow agreements if the intent is to create strict, non-negotiable conditions precedent.

Practical Lessons for Home Buyers and Sellers

When negotiating a post-closing escrow agreement:

1. Clearly define whether deadlines are absolute or whether substantial compliance will suffice.

2. Address how minor punch-list items will be treated.

3. Specify whether issuance of municipal approvals, rather than completion of the underlying work, controls release of funds.

4. Consider including express language addressing extensions for delays outside a party's control.

5. Evaluate whether the escrow amount is reasonably related to the potential harm that could result from delayed performance. Excessive escrow amounts may invite litigation when a dispute arises.

This article is for informational purposes only and does not constitute legal advice. Real estate transactions and escrow disputes are highly fact-specific, and parties should consult counsel regarding their particular circumstances.