Monday, November 5, 2012

When Can a Buyer of Real Property Recover Lost Profits?

Greenwich S.F., LLC v. Wong
Aggrieved Buyers Can Recover Lost Profits
For a Seller’s Breach

By: Terry Rein
Bosso Williams, APC

When a Seller breaches a Real Estate Purchase Agreement by refusing to close escrow, the Buyer may seek specific performance or recover the measure of damages allowed under Civil Code §3306, which provides for recovery of:

The price actually paid;
Title and escrow expenses;
The difference between the price agreed on and the value of the property at the time of breach;
Expenses in preparing to enter the property;
Consequential damages; and

In Greenwich S.F., LLC v. Wong, the Court of Appeal broke new ground in determining that lost profits are properly included in “consequential damages” recoverable by the Buyer under California Civil Code §3306.  In that case, the Buyer entered into a real property sale agreement with plans to renovate and sell the property at a profit.  The original contract price was $760,000, but the Seller later breached the agreement by demanding more.  In the lawsuit that followed, the trial court awarded the Buyer $600,000 for the lost profits that the Buyer had expected to earn after improving and re-selling the property, in addition to other damages.

On appeal, the Greenwich S.F. court explained that consequential damages are those damages that Buyers and Sellers could reasonably have considered to be a likely consequence of a breach at the time of entering into the contract.   The Court  limited the recovery of lost profits to cases where “such profits are  the natural and direct consequence of the breach, where the amount of the lost profits can be established with reasonable certainty, and where the Seller knew of the Buyer's intent to use the property for profit." The requirements are cumulative, and all must be met if lost profits are to be recovered.

The requirement that the Seller must know of the Buyer’s intent to use the property for profits was established in Greenwich S. F., but the Buyer was not able to establish lost profits with reasonable certainty.  Thus, the appellate court reversed the trial court’s award of $600,000 in lost profits because the profits were too “uncertain” and “speculative.”

REALTORS® representing Buyers who intend to renovate and sell property at a profit should consider making the Seller aware of the Buyer’s profit plans in the Real Estate Purchase Agreement or contract document in appropriate cases.  If the Seller is not informed of the buyer’s profit intentions at the time of entering into the contract, lost profits will not be awarded.


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