An issue that client’s grapple with concerns how to measure damages where a contract to buy real property is breached by the purchaser. In 2013, the Court of Appeals (New York State’s highest court) addressed this in a comprehensive decision.
Parties to a real estate contract often assume that where a buyer fails to close, and the seller is forced to sell that property to another, the seller is entitled to damages from the first buyer that is equal to the difference between the first contract price and the second contract price (assuming the contract does not limit damages, which is often the case). This assumption is drawn from general legal principles and common-sense intuition. That assumption, however, is wrong.
The court in White v. Farrell addressed this issue. White entered into a contract to purchase a property from Farrell for $1.725 million. As in almost every transaction, the contract had certain contingencies. In an effort to close, the parties agreed to remove the contingencies in exchange for certain promises and a payment. Ultimately, unhappy with a particular issue, White terminated the contract.
White sued Farrell seeking the return of his down payment. White claimed that Farrell could not close under the terms of their agreement and the down payment should be returned. Farrell denied his inability to close, and counterclaimed for damages due to White’s refusal to comply with the parties’ agreement. During that litigation, Farrell sold the property for some $350,000 less than what White had agreed to pay. The issue that went all the way to the Court of Appeals addresses how much Farrell was entitled to collect as damages for White’s breach, if anything.
Farrell demanded the difference between the amount in the White contract and the selling price. At the initial stage of the litigation, the trial judge held that because White breached the agreement he could not recover the down payment. However, the measure of damages that Farrell could potentially recover, was the difference between the price in White’s contract and the value of the property on the date of breach, but not simply the difference between the two amounts. Because testimony established that the value of the property was the actual selling price, which was also the value on the date of White’s breach, Farrell had no damages that he could recover.