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Monday, April 2, 2007

When Real Estate Deals Fall Apart

Ma00741cbeaconstreetbostonmassachusWhen a real estate deal falls through, what contract damages are available to the seller? Recently, the Massachusetts Supreme Judicial Court addressed this question.

Buyer and seller had a $2,250,000 contract of sale for real estate located on Beacon Street in Boston. The contract of sale was rather unremarkable. It contained an acceptance of deed clause: “acceptance of deed by the BUYER, shall be deemed to be a full performance and discharge of every agreement and obligation herein contained or expressed.” It also contained a liquidated damages clause: “[if] the BUYER shall fail to fulfill the BUYER’s agreements herein, all deposits made hereunder by the BUYER shall be retained by the SELLER and this shall be SELLER’s sole remedy at law or in equity.” The contract did not contain a mortgage contingency clause, and recited that time was of the essence.

The buyer paid the $150,000 deposit. The buyer was not ready to close on the contract date because his financing had not been finalized. The seller’s attorney sent a notice to the buyer that, because the closing did not occur, the contract was breached and deposit was forfeited. Shortly thereafter, the buyer’s financing came through. Nevertheless, the seller put a new “for sale” sign on the property (an effort that was thwarted when the buyer obtained a lis pendens).

A trial judge ordered specific performance, directing that the sale take place at the contract price. The seller still sought liquidated damages. The issue: whether the seller is entitled to liquidated damages for the buyer’s breach of the contract of sale where, subsequent to the breach, the seller obtained court-ordered specific performance. The Massachusetts Supreme Judicial Court held:

When seeking specific performance of a contract, the seller offers to surrender title to the property and collect the purchase price. In bringing an action for damages on the breach of the contract, the seller proposes to retain the property and have his compensation in damages. While these remedies many not be inconsistent in the sense that they are both premised on the validity of the contract, ordinarily a seller is not entitled to seek both remedies; the retention of a deposit as liquidated damages is an alternative to specific performance, not an additional remedy.

The court held that “[t]he only additional damages the seller was entitled to seek under the contract were for carrying costs he incurred as a result of the delay between the expected date of performance and the time of actual conveyance. These carrying costs were separately provided for in the contract and ancillary to its performance.” In other words, these additional damages were not inconsistent with an award of specific performance.

The court concluded:

The law of contracts is intended to give an injured party the benefit of the bargain, not the benefit of the bargain and a windfall. . . . To award liquidated damages against the buyer for his failure to close and also specific performance to the seller requiring the buyer to acquire the property by a date certain at the contracted price, would violate the fundamental principles of contract law.

Perroncello v. Donahue.
Link to oral argument video.
Boston Herald article.

[Meredith R. Miller]

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