April 2011

LEGAL TIPS BY WINNIE WARD

Let's Make a Deal!: The Danger of Consequential Damages Under Greenwich S.F. vs. Wong

Many real estate professionals consider a Buyer’s damages when a seller breaches a purchase agreement to be limited to the buyer’s “out-of-pocket” costs (appraisal, survey, title fees, etc.) and perhaps the “built-in” profit if the property’s purchase price was less than its value as of the date the seller breached the contract (i.e., “benefit-of-the-bargain” damages).

Greenwich S.F., LLC v. Wong (2010) 190 CA 4^th 739 shattered the notion of limited damages

in holding that buyers and sellers also could recover “lost profits” following a contract breach, if they provided sufficient evidence. Real estate professionals should take care in drafting purchase agreements (or using “form” purchase agreements) to protect their clients against such “lost profits” claims.

In Greenwich, the buyer group (Greenwich S.F.) agreed to purchase a property for $760,000.  Prior to entering into a written agreement, one of the Greenwich S.F. parties had orally agreed with the seller’s husband (prior to the husband’s death) to perform work on the property in exchange for compensation for the work performed plus 20% of the resale profits. The seller ultimately breached the purchase contract, demanding $1.2 million for the property.  Greenwich S.F. sued for damages, including “lost profits.” The trial court awarded Greenwich S.F. lost profits damages of $600,000, and the seller appealed.

The appellate court held that Greenwich S.F. did not provide sufficient evidence for the $600,000 in lost profits. However, the court found that such lost profits are recoverable if certain elements are proven. Those elements include: (a) proof of the lost profit amount, with specificity (in Greenwich, the buyer did not satisfy this element), (b) the loss having arisen from the breach, and (c) the seller knowing that the buyer intended to use the property for profit.

The best way to avoid parties to a purchase agreement being subject to a “lost profits” claim is to include (a) for the benefit of the seller, a “Seller’s Default” provision that specifically limits the buyer’s remedies for a seller default to an action for specific performance or recovery of its deposit plus reasonable out-of-pocket costs, and provides for the buyer’s waiver of any “consequential damages”; and (b) for the benefit of the buyer, a “liquidated damages” provision. Many “standard” purchase contracts (including the WinAIR form) do not include these provisions. Adding these provisions can save the parties (and their brokers) headaches later.