Measure of Damages for Breach of a Contract to Purchase Real Property

On July 7, however, the Whites' lawyer wrote to the Farrells indicating that the Whites were electing to terminate the contract because they were unhappy with the drainage conditions on the property. The Farrells sent a time-is-of-the essence letter, but the Whites did not show up at the closing. In June 2006, the Whites, who had since bought another house, sued to recover their $25,000 deposit. The Farrells counterclaimed for damages. Not until early 2007 did the Farrells manage to resell the house, this time for $1,376,550.

In 2009, the Farrells moved for summary judgment, seeking dismissal of the Whites' complaint and an award of damages on their counterclaim, measured by the difference between the original purchase price and the price for which they resold the house ' a total of $348,450. The Whites cross-moved for summary judgment.

Supreme Court concluded that the Whites had breached and were not entitled to return of their deposit, but also concluded that the Farrells were not entitled to any damages. Supreme Court relied on deposition testimony by the Farrells' realtor, who testified that $1.725 million ' the original contract price ' represented the fair market value at the time of the original listing, the time of the contract, and at the time set for closing. The Farrells appealed, but the Appellate Division affirmed without opinion, and the Farrells again appealed.

The Opinions

In an opinion by Judge Susan Read, the Court of Appeals modified, concluding that neither party was entitled to summary judgment. After an exhaustive survey of prior cases, Judge Read found that Supreme Court had correctly concluded that when a buyer of real property breaches a contract to purchase, the measure of damages is the difference between the contract price and the fair market value at the time of breach. But the court also found that Supreme Court had erroneously granted summary judgment, because questions of fact remained about the fair market value at the time of breach. In particular, the court's majority concluded that “the property's substantially lower eventual sale price” was evidence that might be relevant in determining fair market value at the time of breach. In remitting to Supreme Court, the Court of Appeals indicated that the judge would have to consider “whether, or the degree to which, the property's resale in January 2007 ' reflects the fair market value as of October 2005, given the lapse of time ' and any differences in market conditions and contract terms” and “whether the Farrells made sufficient efforts to mitigate ' which is relevant to any weight to be given the resale price'”

Judge Read's analysis is consistent with the measure of damages ordinarily applied in contract law. The seller, not the breaching buyer, bears any risk of market deterioration after the date of the buyer's breach, because the seller should have resold the goods immediately upon learning of the buyer's breach. If that approach is extended to real estate sales, as suggested by the majority, the seller in my introductory hypothetical should not be permitted to recover from the buyer, because the seller bears the risk of any post-breach changes in market conditions.

Judge Eugene Pigott, concurring in result for himself and Judge Robert Smith, argued that this approach should not be applied when real estate sales are at issue. He argued that the assumption that the seller can and should instantaneously resell as the time of breach is unrealistic in the real estate market. He noted first that because of the uniqueness of each property, the pool of buyers for that property is smaller than the pool for most goods. He then noted that to relocate a suitable buyer, the seller will have to reassess the list price, and then show the property to new buyers. Finally, he noted that the very fact that the property has been on the market for a longer period (a consequence of buyer's breach) may cause buyers to conclude that the property is tainted in some way.

Judge Pigott suggested that the court should instead have held that a seller is entitled to recover the difference between the unpaid contract price and the resale price, unless the buyer can prove that the seller did not properly mitigate damages in the period between breach and resale. On the facts of the introductory hypothetical, Judge Pigott would clearly award damages to the seller; his opinion explicitly addresses
the issue of a seller who makes reasonable and good-faith efforts to resell, only to find that market conditions have changed: “If market conditions declined, shouldn't the loss be laid squarely at the feet of the breaching buyer ' ?” On the facts of White v. Farrell, he agreed that remittal was appropriate, but in his view, the trial court should be instructed not to determine market value at the date of breach, but rather to determine whether seller properly mitigated damages.

Conclusion

Judge Pigott's approach commends itself for another reason: It reduces reliance on unreliable expert testimony as to the value of the property, instead placing primary emphasis on the value realized in market transactions. Whether the court's majority left enough room for the trial court to give primary weight to the ultimate sale price remains to be seen.

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Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.

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Suppose a buyer contracts to purchase a retail shopping center for $10 million, paying a deposit of $100,000. Two weeks later, the buyer has second thoughts, and informs the seller that it will not close on the sale contract, and that buyer is prepared to forfeit the deposit. The seller makes immediate efforts to resell the center, but within three months, the area's major employer announces the closing of its plant. A year later, the seller resells for $7 million. What damages may the seller recover from the original breaching buyer? In White v. Farrell, decided last month, the Court of Appeals suggested ' over the objection of two concurring judges ' that the answer might be zero. But because White v. Farrell itself did not present the stark facts suggested in the introductory hypothetical, some chance remains that the hypothetical seller could recover damages.

The White Case

The Farrells had built a second home in upstate New York, but decided to sell it when they considered a move to South Carolina. They listed the new home for sale in 2004, and their real estate agent showed it to the Whites on June 12, 2005. That same day, the Whites signed a contract to buy the house for $1,725,000 ' the asking price ' and paid a $25,000 deposit. The contract was initially subject to some contingencies, including a home inspection, but on June 22, four days after the inspection, the Whites' lawyer approved the contract and the parties executed an addendum removing all contingencies in exchange for the Farrells' agreement to complete several enumerated tasks and to provide a $10,000 credit for drainage work that was not yet complete.

On July 7, however, the Whites' lawyer wrote to the Farrells indicating that the Whites were electing to terminate the contract because they were unhappy with the drainage conditions on the property. The Farrells sent a time-is-of-the essence letter, but the Whites did not show up at the closing. In June 2006, the Whites, who had since bought another house, sued to recover their $25,000 deposit. The Farrells counterclaimed for damages. Not until early 2007 did the Farrells manage to resell the house, this time for $1,376,550.

In 2009, the Farrells moved for summary judgment, seeking dismissal of the Whites' complaint and an award of damages on their counterclaim, measured by the difference between the original purchase price and the price for which they resold the house ' a total of $348,450. The Whites cross-moved for summary judgment.

Supreme Court concluded that the Whites had breached and were not entitled to return of their deposit, but also concluded that the Farrells were not entitled to any damages. Supreme Court relied on deposition testimony by the Farrells' realtor, who testified that $1.725 million ' the original contract price ' represented the fair market value at the time of the original listing, the time of the contract, and at the time set for closing. The Farrells appealed, but the Appellate Division affirmed without opinion, and the Farrells again appealed.

The Opinions

In an opinion by Judge Susan Read, the Court of Appeals modified, concluding that neither party was entitled to summary judgment. After an exhaustive survey of prior cases, Judge Read found that Supreme Court had correctly concluded that when a buyer of real property breaches a contract to purchase, the measure of damages is the difference between the contract price and the fair market value at the time of breach. But the court also found that Supreme Court had erroneously granted summary judgment, because questions of fact remained about the fair market value at the time of breach. In particular, the court's majority concluded that “the property's substantially lower eventual sale price” was evidence that might be relevant in determining fair market value at the time of breach. In remitting to Supreme Court, the Court of Appeals indicated that the judge would have to consider “whether, or the degree to which, the property's resale in January 2007 ' reflects the fair market value as of October 2005, given the lapse of time ' and any differences in market conditions and contract terms” and “whether the Farrells made sufficient efforts to mitigate ' which is relevant to any weight to be given the resale price'”

Judge Read's analysis is consistent with the measure of damages ordinarily applied in contract law. The seller, not the breaching buyer, bears any risk of market deterioration after the date of the buyer's breach, because the seller should have resold the goods immediately upon learning of the buyer's breach. If that approach is extended to real estate sales, as suggested by the majority, the seller in my introductory hypothetical should not be permitted to recover from the buyer, because the seller bears the risk of any post-breach changes in market conditions.

Judge Eugene Pigott, concurring in result for himself and Judge Robert Smith, argued that this approach should not be applied when real estate sales are at issue. He argued that the assumption that the seller can and should instantaneously resell as the time of breach is unrealistic in the real estate market. He noted first that because of the uniqueness of each property, the pool of buyers for that property is smaller than the pool for most goods. He then noted that to relocate a suitable buyer, the seller will have to reassess the list price, and then show the property to new buyers. Finally, he noted that the very fact that the property has been on the market for a longer period (a consequence of buyer's breach) may cause buyers to conclude that the property is tainted in some way.

Judge Pigott suggested that the court should instead have held that a seller is entitled to recover the difference between the unpaid contract price and the resale price, unless the buyer can prove that the seller did not properly mitigate damages in the period between breach and resale. On the facts of the introductory hypothetical, Judge Pigott would clearly award damages to the seller; his opinion explicitly addresses
the issue of a seller who makes reasonable and good-faith efforts to resell, only to find that market conditions have changed: “If market conditions declined, shouldn't the loss be laid squarely at the feet of the breaching buyer ' ?” On the facts of White v. Farrell, he agreed that remittal was appropriate, but in his view, the trial court should be instructed not to determine market value at the date of breach, but rather to determine whether seller properly mitigated damages.

Conclusion

Judge Pigott's approach commends itself for another reason: It reduces reliance on unreliable expert testimony as to the value of the property, instead placing primary emphasis on the value realized in market transactions. Whether the court's majority left enough room for the trial court to give primary weight to the ultimate sale price remains to be seen.

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Stewart E. Sterk, Mack Professor of Law at Benjamin N. Cardozo School of Law, is Editor-in-Chief of this newsletter.

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