Eugene E. Kinsey, Attorney at Law

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BREACH OF REAL ESTATE CONTRACTS

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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]:

    1. the physical condition of the property;
    2. the existence of hazardous materials or dangerous conditions;
    3. encumbrances on the property, including encroachments;
    4. easements or other matters which may affect the other party’s interest in the property; and
    5. 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:

    1. whether the injured party will obtain the substantial benefit he or she reasonably anticipated;
    2. the extent to which the injured party can be adequately compensated in damages for lack of complete performance;
    3. the extent to which the other party has performed;
    4. the extent of hardship on the party failing to perform if the contract is terminated;
    5. the willfulness of the party failing to perform; and
    6. 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:

    1. facts showing a lack of acceptance of the contract [Civ. Code §§1565–1567];
    2. fraud, undue influence, duress [Civ. Code §§1569, 1571–1575, 1689(b)(1)];
    3. mutual mistake of fact [Civ. Code §1689(b)(1)];
    4. lack of consideration [Civ. Code §3391];
    5. failure of a condition [Civ. Code §1434];
    6. 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].
    7. Statute Of Frauds
    8. 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:

    1. the price paid;
    2. the expenses incurred in investigating title and preparing the necessary papers;
    3. the difference between the agreed purchase price and the market value of the property at the time of breach;
    4. the expenses incurred in preparing to enter on the land;
    5. consequential damages according to proof; and
    6. 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:

    1. 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)]
    2. the consideration becomes entirely void from any cause. [Civ. Code §1689(b)(3)]
    3. the consideration entirely fails in a material respect from any cause before it is rendered. [Civ. Code §1689(b)(4)
    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)]
    5. the contract would be prejudicial to the public interest. [Civ. Code §1689(b)(6)]
    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]

 

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