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Real Estate Transactions Gone Wrong: Understanding Seller’s Remedies for Breach of Purchase Agreement
What Are The Seller’s Damages When A Buyer Breaches A Real Estate Purchase Agreement?
When a buyer breaches a real estate purchase agreement, it can be a devastating setback for the seller. With all of the work that goes into finding and preparing to sell a property, buyers who breach their contracts may leave sellers feeling helpless. Fortunately, a seller may recover damages by bringing a damage for breach of contract or by seeking specific performance.
What Is The Seller Entitled To?
A seller’s recoverable damages for the buyer’s breach of contract are determined either (a) by the terms of the contract (a liquidated damages clause); or (b) the damages authorized under CA Civil Code § 3307.
Under CA Civ.C. § 3307, if a buyer breaches a real estate purchase agreement, the seller is entitled to the following:
- General damages, plus
- Consequential damages according to proof
See Kuish v. Smith (2010) 181 CA4th 1419, 1425-1426, 105 CR3d 475, 480—seller’s main measure of damages is the difference between the contract price and the property’s value at time of breach.
What are “General Damages”?
General damages consist of the difference between the contract price and the value of the property. The purpose of the theory of general damages is to place the seller in the position it would have been if the buyer had not breached the agreement. Therefore, the difference between the contract price and the value of the property as of the date of the breach limits the general damages. See Kuish v. Smith (2010) 181 CA4th 1419, 1425-1426, 105 CR3d 475, 480—seller’s main measure of damages is the difference between the contract price and the property’s value at time of breach.
“Fair market value” is the best price obtainable for the property, in cash, from a ready, willing and able buyer. See Major-Blakeney Corp. v. Jenkins, supra; Glendale Fed. Sav. & Loan Ass’n v. Marina View Heights Develop. Co., Inc. (1977) 66 CA3d 101, 141-142, 135 CR 802, 826
If the property value declined as of the buyer’s breach, and if it subsequently appreciates in value, the seller may not be able to claim general damages. As it would result in a double recovery and no longer qualify as a loss of bargain. Spurgeon v. Drumheller (1985) 174 CA3d 659, 664, 220 CR 195, 197; see Allen v. Smith (2002) 94 CA4th 1270, 1278, 114 CR2d 898, 903; Kuish v. Smith (2010) 181 CA4th 1419, 1426, 105 CR3d 475, 480].
What are “Consequential Damages”?
“Consequential damages” are the damages the seller suffered as a result of the “natural consequence” of the buyer’s breach. The damages must be reasonable, foreseeable and necessary to make the seller “whole.” Royer v. Carter (1951) 37 C2d 544, 550, 233 P2d 539, 543; see also Lewis Jorge Const. Mgmt., Inc. v. Pomona Unified School Dist. (2004) 34 C4th 960, 968, 22 CR3d 340, 345
Consequential damages are losses that are “secondary and derivative” losses arising from circumstances specific to the particular contract or parties. The wronged party can recover consequential damages if the breaching party was aware or notified of the circumstances (subjective test) or should have been aware of the potential damages when entering into the agreement. The seller has a duty to mitigate reasonably avoidable consequential damages.
Examples of consequential damages:
- Broker commissions
- Expenses incurred in having to resell to a new party.
- The breach results in lost rent that the wronged party would have generated.
- Lost rent suffered as a result of the seller evicting a tenant to deliver a vacant property to the buyer.
- Operating expenses such as insurance premiums, property tax, mortgage payment, costs to maintain the property.
- If the expenses of commuting between a new property and the property to be sold were reasonably foreseeable at the time the contract was entered into, then the expenses are chargeable.
What are “liquidated damages”?
If the purchase agreement contains a valid liquidated damages provision, CA CIV §3307 is irrelevant. The remedies fixed by the contract or the amount in the liquidated damages provision restrict the seller’s damages.
What is “specific performance”?
If monetary damages are not sufficient, a seller may seek specific performance if the sales contract permits. An action for specific performance requires all of the following:
- A monetary award will not adequately compensate the seller for the buyer’s breach.
- The contract is just and reasonable and will not subject the buyer to undue hardship.
- The contract terms are certain and enforceable to permit a court to determine with reasonable precision the acts required by both sides.
- What the contract requires is substantially similar to the performance that the court has ordered.
- The buyer received adequate consideration for the property.
- The contract is not illegal, fraudulent, made under a mistake, or constitutes unfair practices by either party.
- The seller performed or tendered their obligations under the contract.
- The parties do not have to undertake complicated or multiple acts over an extended period that would render court supervision impossible or impractical, as part of the required performance.
Finally, a breach of a real estate purchase agreement can be a frustrating and complicated experience for both the buyer and seller. By seeking the guidance and support of an experienced real estate attorney, you can safeguard your rights and guarantee the representation of your interests during the process.
It is important to remember that every situation is unique and there is no one-size-fits-all solution to a breach of a real estate purchase agreement. It is crucial to seek out the advice of an attorney who can provide you with a tailored strategy that meets your specific needs and circumstances.
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