February 27, 2008

Specific Performance -- The Good Old Days

A Court of Appeal opinion filed yesterday will leave some real estate investors longing for the good old days -- the days when speculators flipped property as readily as pancakes.

In Real Estate Analytics, LLC v. Vallas, filed February 26, 2008, Fourth District, Div. One (cite as 2008 SOS 1264), the trial court found that the defendant/seller breached his contract for the sale of a large parcel of coastal property in North San Diego County to a real estate investor. Despite the breach, the trial court refused to grant the buyer's request for specific performance ordering the sale of the property. The trial court concluded that money damages were an adequate remedy because the buyer's primary motivation was to quickly resell the property for a profit. Instead, the trial court awarded the plaintiff damages of $500,000 (the difference between the contract price and fair market value at the time of the breach) and attorneys' fees of $272,918.

The Court of Appeal held that the trial court erred by refusing to grant specific performance on the basis the property would quickly be resold for a profit: "The law generally presumes real property is unique and that the breach of an agreement to transfer property cannot be adequately relieved by pecuniary compensation. The seller did not overcome this presumption merely because the buyer's purpose in purchasing the property was to earn profits from developing and/or reselling the property."

With the downturn in the real estate market, this issue is unlikely to come up in the new cases. Instead, it is the seller who will consider suing the buyer for specific performance when a deal falls through. Seller's specific performance cases are generally unheard of in a rising market and require careful handling. There are some significant differences between a seller's and buyer's action for specific performance. As discussed above, damages are usually an inadequate remedy for a buyer of "unique" real property. Where the plaintiff is a seller, damages are generally considered the appropriate remedy and specific performance may only be available where the value of the property has remained more or less the same as the contract price (not likely in most parts of the country). This presents the seller/plaintiff with a paradox: if plaintiff alleges a basis for the recovery of damages, this will undermine the specific performance claim; and if plaintiff demonstrates an entitlement to specific performance this will negate a claim for general damages.