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Breach Of Real Estate
Contracts - General Concepts
Real estate contract litigation involves not only the general
law of contract, but also particular statutory and common law
rules. Whether the contract is a purchase and sale agreement,
an installment land contract, an option to purchase, a lease,
or some other type of instrument, it is subject to the same
principles of law that govern contracts in general.
Consequently, the general law of contracts should be considered
in any dispute concerning a real estate agreement and could
have a decisive impact on the rights and obligations of the
parties. For example, requirements for contract formation and
enforceability, rules applicable to contract interpretation,
and other general contract issues are important in litigation
involving real estate agreements.
Essential to the formation of a contract and, if not present,
will affect its enforceability: (1) the parties to the contract
must be capable of contracting; (2) the parties must consent
to the agreement; (3) the contract must have a valid object;
and (4) the contract must be supported by sufficient consideration.
[Civ. Code §1550] In addition, most agreements affecting
an interest in real property must be in writing. [Civ. Code
§§1091, Civ. Code 1624(a)(3), (4), (6)]
Other commonly litigated issues in real estate contract disputes
include applicability of the statute of frauds, acts constituting
breach, questions concerning title to real property, and the
availability of particular remedies.
Applicability Of The Statute
Of Frauds
The statute of frauds provides that certain types of contracts
are unenforceable unless evidenced by a writing. Several types
of real estate contracts come within the statute of frauds.
[Civ. Code §1624]
The following agreements, among others, are invalid unless
made in writing and signed by the party to be charged or that
party’s agent:
(1). an agreement to lease real property for a period longer
than 1 year, or to sell real property or an interest in real
property. [Civ. Code §1624(a)(3); see Civ. Code §1091(estate
in real property other than estate at will or for term of
1 year or less can be transferred only by operation or law
or by instrument in writing)];
(2). an agreement authorizing another for compensation to
purchase or sell real estate, to lease real estate for more
than 1 year, or to find a purchaser, seller, lessee, or lessor
of real estate for a term of more than 1 year. [Civ. Code
§1624(a)(4); see Civ. Code §§1091, 2309]; and
(3). an agreement by a purchaser of real property to pay
a debt secured by a mortgage or deed of trust, unless assumption
of the debt by the purchaser is specifically provided for
in the conveyance of real property. [Civ. Code §1624(a)(1)].
Other agreements that must be in writing include: (1) contracts
creating a joint tenancy [Civ. Code §683] (2) contracts
which by their terms are not to be performed within 1 year [Civ.
Code §1624(a)(4) and (3) agreements to arbitrate disputes
[Code Civ. Proc. §§1280(f), 1281, 1281.2]
The "Equal Dignities Rule" expands on Civ. Code §1624(d)by
requiring that an agent’s authority to enter into any
contract required by law to be in writing can itself only be
given by a written instrument. Oral authorization is insufficient
for an agent to bind his principal to any contract that is within
the statute of frauds. [Civ. Code §2309]
Despite the broad language of Civ. Code §1624that contracts
coming under the statute of frauds are "invalid,"
courts often find that the statute of frauds relates to remedies
only and not to the substantial validity of the contract. Thus,
noncompliance with the statute does not render the contract
void, but only unenforceable. Oral agreements are valid and
effective until their invalidity is asserted as a defense to
enforcement. Failure to timely assert the defense waives the
statute.
Exceptions To Statute
Of Frauds Requirements
Application of the statute of frauds may have draconian consequences
in some instances. As a result, judicially formulated exceptions
to the statutory rules have evolved to alleviate the harsh consequences
of the statute and to render it inapplicable in certain circumstances.
Some of these are:
Equitable Estoppel: Equitable estoppel operates
to relieve oral contracts from the statute of frauds and makes
them binding where: (1) the defendant represents by words
or conduct that he or she will stand by the agreement and
the plaintiff detrimentally relies on this representation
Unconsciouability: Unconscionable injury
to the plaintiff or unjust enrichment of the defendant would
result from a refusal to enforce the agreement
Justifiable Reliance: Where the owner of
real property has changed his or her position in reliance
on an oral purchase offer, the buyer may be estopped from
avoiding the contract on the basis of the statute of frauds.
Executed Oral Agreements: In addition, executed
oral agreements are exempt from the statute. Where a bilateral
oral contract has been fully executed by one party, the remaining
promise is outside the statute of frauds and the party who
has performed may enforce the agreement against the other
party.
Partial Performance: Although an estate
or interest in real property, other than a lease for a term
of 1 year or less, can be created only by a signed writing
[Code Civ. Proc. §1971], this does not abridge the power
of any court to compel the specific performance of an agreement
in case of partial performance of the agreement [Code Civ.
Proc. §1972]. Partial performance in this context generally
means that the purchaser or lessee has taken actual, open,
and notorious possession of the property.
Fraud: If the fraud of one of the contracting
parties prevents a contract within the statute of frauds from
being reduced to writing, the contract may be enforceable
against the fraudulent party. Any other party who is led by
the fraud to believe that the contract is in writing and acts
on that belief to his or her prejudice may enforce the contract
against the fraudulent party. [Civ. Code §1623] Further,
even where an oral agreement is unenforceable as a contract,
the misled party may bring a separate action for fraud.
Rights And Duties Of The
Parties To A Real Estate Contract
Marketable Title: There is an implicit promise
in every contract for the sale of real property that the seller’e
is marketable or merchantable. Where the term "grant"
is used in the conveyance of a fee simple estate and no contradictory
terms appear in the instrument, the seller of real property
impliedly covenants that: (1) he or she has not previously conveyed
the same estate or any interest in the estate to someone other
than the buyer; and (2) the property to be conveyed is free
from any encumbrances done, made, or allowed by the seller.
[Civ. Code §1113]
"Marketable title" is title that a reasonable, well-informed
purchaser exercising ordinary business judgment and prudence
would be willing to accept.
Warranties: A warranty in a real property
purchase and sale agreement is an express or implied representation
by the seller as to some qualitative aspect of the property.
A warranty serves to compel the seller to disclose material
facts regarding the property and to give the buyer particular
assurances regarding the status of the property. Warranties
may consist of affirmative representations that a seller is
not otherwise obligated to make. A seller’s obligation
on a warranty is absolute; liability is imposed on breach regardless
of whether the seller knew or should have known that the representation
made was false.
Timely Performance: Under certain circumstances,
the failure of either party to a real property contract to timely
perform may deprive that party of the right to specific performance
and give rise to liability for damages caused by the breach
of contract. [See Civ. Code §1657 (providing that if no
time for performance is specified in contract reasonable time
is allowed]
Good Faith & Fair Dealing: Every contract
contains an implied covenant of good faith and fair dealing
by which each party promises not to do anything that might injure
the right of the other party to receive the benefits of the
agreement. The covenant requires a party to do everything the
contract presupposes he or she will do to accomplish its purpose.
Seller's General Duty To Disclose: Sellers
of residential real property have a duty to disclose any facts
materially affecting the value or desirability of the property
that are known or accessible only to the seller and not known
to or within reach of the diligent attention and observation
of the buyer. However, the seller is not liable for latent defects
in property which he or she did not know about and had no reason
to believe existed.
Real Estate Disclosure Statement: Transferors
of residential property must provide purchasers with a Real
Estate Transfer Disclosure Statement ("transfer disclosure
statement"). [Civ. Code §§1102–1102.15]
Any waiver of these requirements is void as against public policy.
[Civ. Code §1103(d)] This requirement applies to a sale,
exchange, installment land sale contract, lease with an option
to purchase, any other option to purchase, or ground lease coupled
with improvements. The seller or transferor must deliver to
the prospective buyer or transferee a written disclosure statement
under Civ. Code §§1102 and 1102.2. [Civ. Code §1102]
Delivery of the disclosure statement must be by personal delivery
to the transferee or by mail to the prospective transferee.
[Civ. Code §1102.10]
The transfer disclosure statement form includes the seller’s
disclosure of information regarding the following [Civ. Code
§1102.6]:
- the physical condition of the property;
- the existence of hazardous materials or dangerous conditions;
- encumbrances on the property, including encroachments;
- easements or other matters which may affect the other
party’s interest in the property; and
- lawsuits against the seller threatening to affect or affecting
the property.
Transferors of residential property must also disclose to potential
buyers, if applicable, that the property is in a natural hazard
area [Civ. Code § 1103; see § 1:30.1] and that the
property is subject to a lien created under the Mello-Roos Community
Facilities Act [Civ. Code §1102.6b] or to a fixed lien
of assessment collected in installments to secure bonds issued
pursuant to the Improvement Bond Act of 1915 (Division 10 (commencing
with Section 8500 of the Streets and Highway Code)). In addition,
cities or counties may require that sellers or their agents
deliver to purchasers the Local Option Real Estate Transfer
Disclosure Statement set forth in Civ. Code §1102.6a(b).
[Civ. Code §1102.6a(a)]
Under Civ. Code §1102.13, any person who willfully or
negligently violates the disclosure requirements is liable in
the amount of the actual damage suffered by the purchaser.
An "as is" clause in a purchase and sale agreement
does not insulate the seller from the common law duty to disclose
defects or the requirements of Civ. Code §§1102 et
seq. "As is" language serves to give notice of patent
defects and means that the buyer accepts the property in the
condition in which it is reasonably observable by him or her.
If augmented by language indicating that the buyer is relying
on his or her own inspection of the property, it may also relieve
the seller of the duty to inspect for defects or to disclose
matters that the seller should know but does not. However, the
benefits of Civ. Code §§1102 et seq. are not waived
merely by the buyer’s acceptance of "as is"
language in the purchase agreement, and the seller remains liable
for any failure, whether negligent or intentional, to reveal
known concealed defects not apparent from an inspection of the
property.
Similarly, "as is" language in a real property sale
agreement does not shield a seller from liability for fraud.
[Civ. Code §1668 (providing that contracts that directly
or indirectly exempt anyone from responsibility for fraud are
against policy of law)]
Acts Constituting Breach
Of Real Estate Contract
The wrongful failure to perform a contract or a material promise
in a contract, where the nonperformance is not excused or justified,
is a breach. The failure to perform any contract obligation
subjects the defaulting party to liability for damages, regardless
of the extent of the breach and whether or not it also excuses
performance of the nonbreaching party. [See Civ. Code §3300].
Where a breach is only partial, it relieves the other party
of the duty to perform only if it is also material. Among the
factors to be considered in determining the materiality of a
breach are the following:
- whether the injured party will obtain the substantial
benefit he or she reasonably anticipated;
- the extent to which the injured party can be adequately
compensated in damages for lack of complete performance;
- the extent to which the other party has performed;
- the extent of hardship on the party failing to perform
if the contract is terminated;
- the willfulness of the party failing to perform; and
- the extent of uncertainty that the party failing to perform
will perform the remainder of the contract.
Defenses To Breach Of
Contract Actions
The fundamental principles of contract formation may be raised
in defense of a breach of contract action on a real property
agreement. Some of these are:
- facts showing a lack of acceptance of the contract [Civ.
Code §§1565–1567];
- fraud, undue influence, duress [Civ. Code §§1569,
1571–1575, 1689(b)(1)];
- mutual mistake of fact [Civ. Code §1689(b)(1)];
- lack of consideration [Civ. Code §3391];
- failure of a condition [Civ. Code §1434];
- contract is void because the object is either impossible
[Civ. Code §§1597–1598], unlawful [Civ.
Code §1598], or "so vaguely expressed as to be
wholly unascertainable" or uncertain [Civ. Code §1598].
- Statute Of Frauds
- Statute of limitations to bring the action (may be 2 years
or 4 years depending on the specific facts of the case)
Real Estate Contract Remedies
Contract Damages Recoverable By A Buyer: A
buyer’s right to recover damages against a seller for
breach of a purchase and sale agreement is measured either by
Civ. Code §3300 or Civ. Code §3306. Where the breach
arises from a covenant or warranty in the sale agreement, the
general contract measure of damages applies and the buyer is
entitled to the amount that will compensate him or her for all
detriment proximately caused by the breach or likely to result
from it.
Where the seller fails to perform altogether by refusing to
convey title, the buyer’s recovery is determined under
Civ. Code §3306. These damages include:
- the price paid;
- the expenses incurred in investigating title and preparing
the necessary papers;
- the difference between the agreed purchase price and the
market value of the property at the time of breach;
- the expenses incurred in preparing to enter on the land;
- consequential damages according to proof; and
- interest.
Damages for breach of contract are confined to those that are
foreseeable or could reasonably have been contemplated as a
result of the breach.
Contract Damages Recoverable By A Seller.
The seller’s damage remedy on a buyer’s failure
to tender the purchase price under a sale agreement is the excess,
if any, of the contract price over the property’s value
at the time of the breach, together with consequential damages
according to proof and interest. [Civ. Code §3307] If the
property is resold for a price exceeding the contract price
together with any consequential damages, the seller has no damages
and may not recover from the defaulting buyer, regardless of
the willfulness of the breach.
Consequential damages are any additional expenses that naturally
flow from the breach and are necessary to assure the seller
the benefit of his or her bargain. For example, the seller may
recover expenses incurred in remarketing the property to be
sold, including a broker’s commission. If the seller chooses
not to use a broker for the resale, he or she may still be entitled
to recover the amount of such a fee. The seller may even recover
a hypothetical broker’s commission at the market price
where the property is not resold at all.
Fraud Damages: If fraud is involved in the
purchase, sale, or exchange of real property, Civ. Code §3343
may govern the measure of damages. Under Civ. Code §3343,
the out-of-pocket measure is expanded to compensate for out-of-pocket
losses and additional damage arising from the transaction where
there is fraud in the acquisition or disposition of property.
[Civ. Code §3343]
A person defrauded in the sale or exchange of real property
is entitled to the difference between the actual value of that
with which he or she parted, and the actual value of that which
he or she received, together with any additional damage arising
from the transaction. Additional damage may include an amount
actually and reasonably expended in reliance on the fraud, and
an amount that will actually compensate the defrauded party
for loss and enjoyment of the property to the extent that the
fraud caused that loss. [Civ. Code §3343(a)(1) and (a)(2)]
Where the defrauded party has been induced by the fraud to
sell or otherwise part with the property, that seller is entitled
to recover an amount that will compensate him or her for profits
or other gains that might reasonably have been earned by use
of the property had the seller retained it. [Civ. Code §3343(a)(3)]
Similarly, where the defrauded party has been induced by reason
of the fraud to purchase or otherwise acquire the property,
that purchaser is entitled to an amount that will compensate
him or her for any loss of profits or other gains that might
have been earned from the use or sale of the property had it
possessed the characteristics fraudulently attributed to it.
However, this recovery is only allowed where all of the following
apply: (1) the defrauded purchaser acquired the property to
resell it for a profit; (2) the defrauded purchaser reasonably
relied on the fraud in entering into the transaction and in
anticipating profits from the subsequent sale; and (3) the lost
profits for which damages are sought were proximately caused
by the fraud and the defrauded purchaser’s reliance on
it. [Civ. Code §3343(a)(4)(i)–(iii); for discussion
of punitive damages, see § 1:43]
Punitive Damages: In an action for breach
of an obligation not arising from contract, where it is proven
by clear and convincing evidence that a person has been guilty
of oppression, fraud, or malice, the plaintiff, in addition
to recovering actual damages, may also recover punitive or exemplary
damages. [Civ. Code §3294(a)] The plaintiff must establish
the basis for recovery of punitive damages by clear and convincing
evidence. [Civ. Code §3294(a)] Thus, punitive damages are
generally not recoverable for breach of contract, no matter
how willful or malicious, except where the wrongful act is also
a tort such as actual fraud [Civ. Code §1572] or deceit
[Civ. Code §§1709, 1710].
As used in Civ. Code §3294, fraud is an intentional misrepresentation,
deceit, or the concealment of a material fact known to the defendant
with the intention of depriving a person of property or legal
rights or otherwise causing injury.
Liquidated Damages: The parties may agree
in advance as to the amount of damages which will be paid in
the event of a breach of agreement to buy or sell real property.
Such damages are called "Liquidated Damages." The
enforceability of liquidated damages provisions after a buyer’s
default on a real property purchase and sale agreement is governed
by Civ. Code §§1675–1681.
Prejudgment Interest: Recovery of prejudgment
interest is available in contract actions from the date payment
was due or when the damages became certain or capable of being
calculated to a certainty. [Civ. Code §3287(a)]
Attorney Fees: The rules for recovery of fees
by the prevailing party in contract actions are set forth in
Civ. Code §1717. If a contract provides that attorney fees
and costs incurred to enforce the contract must be awarded to
one of the parties or to the prevailing party, then the party
that is determined by the court or arbitrator to be the prevailing
party on the contract must be awarded reasonable attorney fees
in addition to other costs. The prevailing party is the party
recovering the greater relief in the action. [Civ. Code §1717]
A party who prevails on a contract cause of action may be entitled
to attorney fees under a contractual attorney fee provision
even though the opposing party prevailed on other causes of
action.
Rescission And Restitution: A real property
contract, like other types of contracts, may be rescinded under
specific circumstances. [See Civ. Code §1689] Rescission
extinguishes the contract, terminates further liability on the
agreement, and restores the parties to their former positions.
This generally requires each party to return any consideration
received prior to the rescission.
When a contract has been rescinded in whole or in part, any
party to the contract may seek relief based on that rescission
by: (1) bringing an action to recover any money or thing owing
to him or her by any other party to the contract as a consequence
of the rescission or for any other relief to which he or she
may be entitled under the circumstances; or (2) asserting rescission
as a defense or cross-complaint.
A contract may be rescinded under the following circumstances:
(1) where the parties mutually consent to rescission [Civ. Code
§1689(a)]; (2) where the consent of the rescinding party
or of a jointly contracting party was obtained by mistake, fraud,
undue influence, duress, or menace perpetrated by another party
[Civ. Code §1689(b)(1)
A real estate contract may also be rescinded when:
- the consideration for the obligation of the rescinding
party fails, in whole or in part, due to the fault of the
other party. [Civ. Code §1689(b)(2)]
- the consideration becomes entirely void from any cause.
[Civ. Code §1689(b)(3)]
- the consideration entirely fails in a material respect
from any cause before it is rendered. [Civ. Code §1689(b)(4)
- the contract is unlawful for causes that do not appear
in its terms or conditions and the parties are not equally
at fault. [Civ. Code §1689(b)(5)]
- the contract would be prejudicial to the public interest.
[Civ. Code §1689(b)(6)]
- rescission is authorized under any special statutory ground.
[Civ. Code §1689(b)(7)]
Generally, to effect a rescission a party to a contract must,
promptly on discovering the facts justifying rescission, do
the following: (1) give notice of rescission to the other party;
and (2) restore to the other party everything of value received
under the contract or offer to restore on the condition that
the other party do likewise. The service of a pleading in an
action or proceeding that seeks relief based on rescission fulfills
both of these requirements. [Civ. Code §1691
Reformation: Reformation is an equitable remedy
that can be used to correct a real estate purchase and sale
agreement or other instrument, such as a deed, mortgage, or
lease, in order to state the true agreement of the parties.
The remedy presumes the existence and validity of the contract
and serves as a vehicle to correct the terms to reflect the
actual intent of the parties at the time the contract was made.
Cancellation: Cancellation, like rescission,
seeks to terminate an agreement or instrument. These remedies
differ in that cancellation is used to void a particular document,
while rescission extinguishes the entire contract. Cancellation
does not place the parties exactly in their former positions;
it merely makes the instrument cancelled a nullity from that
point forward. That is, executory obligations are discharged
as of the date of cancellation, but the parties are not required
to "unwind" the contract as to any prior performance.
In contrast, rescission extinguishes the contract and treats
it as null and void from the inception, and requires the restoration
of consideration through restitution. [Civ. Code §1688]
Specific Performance: "Specific performance"
relief is given by compelling a party to do that which ought
to be done. [Civ. Code §3367(2)] In the case of a real
property transaction they buyer may file an action for specific
performance to compel a seller to convey the real property which
is the subject of the transaction and the seller may file an
action to require the buyer to purchase the property.
Specific performance requires a showing that plaintiff fully
and fairly performed all conditions precedent on his or her
part according to the obligation. If the plaintiff’s failure
is only partial, immaterial, or capable of being fully compensated,
specific performance may be compelled on full compensation being
made by the plaintiff for the default. [Civ. Code §3392]
Fees & Costs:
Real estate litigation matters are rarely taken by our office
on a contingency basis. The usual fee structure for these kinds
of cases is as follows:
- Attorney fees: $250 per hour with
a minimum fee varying with the size and complexity of the
case.
- Costs: Initial filing fee approximately
$300. Other fees which may or not be necessary in your particular
case are: motion fees, fees for service of process, deposition
fees, etc..
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