When a buyer or seller violates the obligations of a purchase and sales contract, it can cost the injured party a lot of time and money, potentially turning the deal of your dreams into an extended nightmare. Luckily, there are available remedies, but the best option depends on whether you are the buyer or seller, the type of damage, the market, and your individual contract.
TYPES OF DAMAGES
Damages are either compensatory, meaning to compensate for actual loss due to the breach, or punitive, to deter similar actions in the future. Punitive damages are rare for breach of contract, and require the plaintiff to prove fraud or malice. More typically, the injured party will pursue compensatory damages, which are categorized as either general or special damages.
General damages seek to restore the plaintiff’s financial condition to a state equivalent to what it would have been had the contract been fulfilled, compensating for loss as a direct result of the breach. General damages are the most common awarded form of damages, and are the easiest to predict or determine, since they flow directly from the terms of the contract. Therefore, they do not need to be specifically pled.
Special (or “consequential) damages, by contrast, cover actual but indirect monetary losses due to special circumstances. While these circumstances are less predictable, however, the plaintiff must prove that the defendant was knowledgeable of the special circumstances and they were foreseeable at the time the contract was established. This is so that the defendant is aware of the consequences of a breach and is protected from unforeseeable and limitless liability. Since these are circumstances specific to the individual contract, special damages need to be alleged and proven by the plaintiff.
Whether and how an injured party in a purchase and sales dispute can recover damages often depends on the state of the real estate market, and in this regard the market typically affects the buyer and seller’s options inversely.
- Suing for Damages
Damages are calculated based on the difference between the contracted price and the current value of the property, plus any special damages and interest.
For the seller, damages are often very difficult to determine, and pursuing damages usually requires the seller to demonstrate a good faith effort to sell the property to a new buyer. So if the property is sold at a profit before the trial, the seller won’t receive damages for the breach. This means, it is usually not advantageous to pursue damages through suit except in a declining market, where there is a clear loss of value, or in the case of significant special circumstances.
For the buyer, by contrast, in a declining market, the buyer is unlikely to be able to claim damages, but in a rising market, the change in value might be significant, and thus a suit for compensatory damages may well be the best course of action.
- Specific Performance
A suit for specific performance is considered an alternative to seeking damages. In a suit for specific performance, the injured party asks the court to enforce the terms of the contract. This suit may also include compensation similar to damages, but the purpose is to fulfill the terms of the contract that were breached rather than seeking termination. However, it is costly and slow, and such a suit assumes that the defendant is capable of performing the provisions of the contract.
Therefore, for the seller, a suit for specific performance may be impossible. For example, if the buyer cannot obtain the promised financing, the contract cannot be fulfilled. However, in a declining market and depending on the kind of breach, this may be a viable option.
For the buyer, the suit for specific performance is more likely to be an attractive option, since there are usually fewer complications that would entirely preclude the seller from completing the sale as promised, and a suit for specific performance is the typical remedy for buyers in a rising market.
- Liquidated damage provision
It is common to include a liquidated damages provision within the contract which specifies a maximum dollar amount for damages that can be claimed in the result of a breach of contract. Such a provision helps to avoid contention over the actual amount of damages which, as aforementioned, can be difficult to determine.
For the seller, liquidated damages are the typical remedy, especially in a stable or rising market. However, such a provision precludes the seller from seeking actual damages, so in a declining market, a seller may only be able to recover a fraction of the real decline in value of the property. Often the liquidated damages provision may simply stipulate that in the case of a breach, the buyer forfeits the earnest money, the good faith deposit the buyer gives to the seller while the buyer takes time to pursue contingencies (title search, property appraisal, inspections). In this manner, the parties can avoid the time, effort, and expense of proving compensatory damages in court.
Liquidated damages are not typically a provision for buyers in a real estate purchase agreement, but in a declining market, it is worth considering, since a buyer may be able to recover damages for a seller’s breach of contract when a buyer might otherwise not be able to claim actual damages.
Choosing how to handle a breach of contract is a stressful situation that depends on a number of factors, but the difficulty can be mitigated by knowledge and forethought about worst case scenarios. If such an unfortunate circumstance should arise, consult with a real estate attorney to determine your best option. At Gomez & Simone, we are dedicated to…