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Friday, April 5, 2013

The Measure of a Seller’s Damages for Breach of a Real Estate Sale Contract

House-contract-and-home-for-sale-by-ginkgo2
Remarkably, until just last month, the New York Court of Appeals was not presented with the occasion to decide the measure of a seller’s damages for a buyer’s breach of contract to purchase real property.  Should the damages be based on the difference between the contract price and the market value of the property at the time of breach?  Or, should the damages be based upon the difference between the contract price and the lower price obtained by the seller in a later resale of the property?

Relying heavily on Williston, the Court held that the measure of damages is “the difference, if any, between the contract price and the fair market value of the property at the time of the breach.”  The Court stated that the resale price is not irrelevant to the determination of damages because,

in a particular case, it may be very strong evidence of fair market value at the time of breach.   This is especially true where the time interval between default and resale is not too long, market conditions remain substantially similar, and the contract terms are comparable.

JpigottJudge Piggott concurred in the result (issues of fact required a trial), but he would have adopted a resale measure based upon the Uniform Land Transfers Act.  Piggott reasoned:

The non-breaching sellers are entitled to the benefit of their bargain, and that benefit should not be denied by the application of a rule that fails to take that basic tenet into account.  The cases cited by the majority in support of the "time-of-the-breach" rule appear to apply the rule by rote. . ., detached from the reality of realty by failing to consider the legal consequence of an axiom that is harmful to the non-breaching party.

The majority ultimately supports its adoption of the "time-of-the-breach" rule – which is common in contract law and in the Uniform Commercial Code where the parties are dealing in common activities or fungible goods – by relying primarily on a case involving a school district's cause of action seeking the cost of replacing or repairing defective window panels that had been installed in its building (see Brushton-Moira Cent. School Dist. v Thomas Assoc., 91 NY2d 256 [1998]). There, the Court, applying general, black letter law, stated that "damages for breach of contract are ordinarily ascertained as of the date of the breach" (id. at 261 [citations omitted]).

But real property, unlike window panels, is not fungible. While there are usually extensive and active markets for fungible goods, thereby making it relatively less difficult for the seller to mitigate or cover in the event of a breach, the sale of real estate is clearly different because each parcel is unique. . . As a result, the pool of buyers is plainly smaller for real estate than goods, and when a buyer breaches a real estate purchase agreement, the seller must then commence the sale process anew, which may require a reassessment of the list price and more showings of the property to new buyers, who may or may not find the property's location, amenities or architectural style desirable.  This may take a substantial amount of time and effort on the seller's part, and the seller's efforts may not readily succeed, because once the house has been on the market for a significant period of time, the market may have declined or prospective purchasers may be wary of the amount of time the house has been on the market, leading them to conclude that the property is tainted in some fashion.  Meanwhile, under our holding today, the breaching buyer will walk away indifferent to the hardship caused to the seller by his conduct. 

* * *

There is no dispute that the general rule is that damages are measured by the fair market value at the time of the breach; the issue here is whether that measure, in cases where the property is later sold with reasonable diligence and in good faith, is adequate or even realistic.  In such a circumstance, why should the non-breaching seller suffer the consequences of the buyer's breach?  If market conditions decline, shouldn't the loss be laid squarely at the feet of the breaching buyer, particularly where the seller is able to make a colorable claim at trial in that regard?

The majority also holds that the trial court in this case will need to consider, among other things, whether the sellers "made sufficient efforts to mitigate" . . ., but mitigation is irrelevant under the majority's rule since the only calculation that matters is the difference between the fair market value at the time of the breach and the contract price.

Here's a link to a webcast of the oral argument.

White v. Farrell, No. 43 (N.Y. Ct. of Appeals Mar. 21, 2013).

[Meredith R. Miller]

http://lawprofessors.typepad.com/contractsprof_blog/2013/04/the-measure-of-a-sellers-damages-for-breach-of-a-real-estate-sale-contract-.html

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