NY High Court Decides What is Recoverable in Breach of Real Estate Contract Case

By April 5, 2013Business Law

On March 31, 2013, the New York Court of Appeals in White v. Farrell held that the measure of damages for a buyer’s breach of contract to sell real property is the difference between the contract price and the fair market value of the property at the time of the breach. The case involved a couple that decided to sell lakeside property in Upstate New York. A contract to purchase the real estate was fully executed on June 13, 2005 for a purchase price of $1.725 million. While the real estate was under contract, an issue came up with respect to a drainage system on the property. The seller agreed to lower the purchase price by $10,000.00, and thereafter, all contingencies were removed from the contract. On July 7, 2005, however, the buyers elected to terminate the contract due to their belief that upon closer inspection the drainage situation might never be rectified. The seller refused to cancel the contract and withheld reimbursement of the $25,000.00 down payment. The buyer filed suit seeking to recover the $25,000.00 down payment, and the seller counterclaimed for damages for the breach of contract. While the lawsuit was pending, the seller accepted a purchase offer of $1.376 million. The New York high court rejected the seller’s invitation to adopt a rule that would award damages equal to the difference between the contract price and the resale price. The court noted that the “Time of the Breach Rule” is the longstanding rule in New York. It was consistent with general contract principles. The court further explained that the fair market value question is a question of fact. While the original contract price and the subsequent purchase price are both relevant, neither are conclusive with respect to the amount of damages. The court then remanded the case to the trial court for further proceedings and instructed the court to consider at least the following factors relevant to damages: 1) the degree to which the property’s resale in January 2007 for $1.376 million reflected the fair market value as of October 2005 given the lapse of time (about fourteen months) and any difference in market conditions and contract terms; 2) whether the seller made sufficient efforts to mitigate, i.e., to resell at a reasonable price after the breach of contract, which is relevant to any weight to be given to the resale price as a measure of fair market value at the time of the breach; and 3) the cost to remedy the property’s drainage deficiencies which, like the cost to complete several other specified tasks and the $10,000.00 credit – all agreed to by the parties in the contract addendum, should be subtracted from $1.725 million (the original contract price) in order to establish the contract price to be compared to the property’s fair market value in October 2005.

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