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

April 5, 2013

Remarkably, until just last month, the New York Court ofAppeals was not presented with the occasion to decide the measure of a seller’sdamages for a buyer’s breach of contract to purchase real property. Should the damages be based on thedifference between the contract price and the market value of the property atthe time of breach? Or, should thedamages be based upon the difference between the contract price and the lowerprice obtained by the seller in a later resale of the property?

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

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

Judge Piggott concurred in the result (issues of factrequired a trial), but he would have adopted a resale measure based upon theUniform Land Transfers Act. Piggott reasoned:

The non-breaching sellers are entitled to the benefit oftheir bargain, and that benefit should not be denied by the application of arule that fails to take that basic tenet into account. The cases cited by the majority insupport of the “time-of-the-breach” rule appear to apply the rule byrote. . ., detached from the reality of realty by failing to consider the legalconsequence 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 inthe Uniform Commercial Code where the parties are dealing in common activitiesor fungible goods – by relying primarily on a case involving a schooldistrict’s cause of action seeking the cost of replacing or repairing defectivewindow panels that had been installed in its building (see Brushton-Moira Cent.School Dist. v Thomas Assoc., 91 NY2d 256 [1998]). There, the Court, applyinggeneral, black letter law, stated that “damages for breach of contract areordinarily 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 coverin the event of a breach, the sale of real estate is clearly different becauseeach parcel is unique. . . As a result, the pool of buyers is plainly smallerfor real estate than goods, and when a buyer breaches a real estate purchaseagreement, the seller must then commence the sale process anew, which mayrequire a reassessment of the list price and more showings of the property tonew buyers, who may or may not find the property’s location, amenities orarchitectural style desirable. This may take a substantial amount of time and effort on the seller’spart, and the seller’s efforts may not readily succeed, because once the househas been on the market for a significant period of time, the market may havedeclined or prospective purchasers may be wary of the amount of time the househas been on the market, leading them to conclude that the property is taintedin some fashion. Meanwhile, underour holding today, the breaching buyer will walk away indifferent to thehardship caused to the seller by his conduct.

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There is no dispute that the general rule is that damagesare measured by the fair market value at the time of the breach; the issue hereis whether that measure, in cases where the property is later sold withreasonable diligence and in good faith, is adequate or even realistic. In such a circumstance, why should thenon-breaching seller suffer the consequences of the buyer’s breach? If market conditions decline, shouldn’tthe loss be laid squarely at the feet of the breaching buyer, particularlywhere the seller is able to make a colorable claim at trial in that regard?

The majority also holds that the trial court in this casewill need to consider, among other things, whether the sellers “madesufficient efforts to mitigate” . . ., but mitigation is irrelevant underthe majority’s rule since the only calculation that matters is the differencebetween the fair market value at the time of the breach and the contract price.