Damages for Seller’s Breach of a Real Estate Purchase and Sale Agreement: a Recent Case Example

by Wendel, Rosen, Black & Dean LLP
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When a seller breaches a purchase and sale agreement and fails to complete the sale to the buyer, the buyer’s usual remedy is to seek “specific performance” of the agreement — i.e., a court judgment ordering the seller to complete the sale.

But specific performance isn’t always a meaningful remedy.  Like when the property has suffered “waste” at the hands of the seller and is no longer desirable.

A recent California Court of Appeal opinion from the First District — Shellinger Brothers v. Cotter — illustrates how damages awarded under Civil Code section 3306 can provide a jilted buyer with effective relief.

Facts

The Purchase and Sale Agreement

In a purchase and sale agreement signed in 1998, the Shellinger Brothers (“Shellinger”) agreed to buy a 21 acre tract of property in the City of Sebastopol from James Cotter, with the goal of developing it.

The agreement was expressly conditioned on Shellinger obtaining subdivision Map approval from the City.  The agreement also required the the completion of Lot Line Adjustments to separate the property Shellinger intended to develop from the front commercial parcels to be retained by Cotter.

As is typical, the agreement also prohibited Cotter from permitting any liens, encumbrances, or easements on the property, and prohibited Cotter from permitting “any act of waste or act that would tend to diminish the value of the property for any reason….”

Early Litigation and the Map Condition

After an initial round of litigation between the parties, Shellinger was given two years to obtain the necessary subdivision Map that would make their envisioned project viable — one of the conditions in the purchase and sale agreement.

It quickly became clear that Shellinger was not going to be able to obtain the Map within the two year period.  Shellinger’s efforts to comply with the EIR process in order to obtain the Map were “continually frustrated” by the City’s denials and non-action.

So, Shellinger waived that condition, and elected to go forward with the purchase without the Map.

Cotter’s Shenanigans

Cotter’s conduct drew negative attention from both the trial court and the Court of Appeal.

In 1999, the Lot Line Adjustment was completed, but Cotter apparently refused to sign it and the application expired.  In 2002, the Lot Line Adjustment was again ready to be finalized, but Cotter submitted escrow instructions to not record the Lot Line Adjustment until Shellinger’s subdivision Map was recorded.

Cotter also refused to pay the property taxes.  To prevent tax liens from encumbering the property and threatening the Lot Line Adjustment application, Shellinger paid the taxes for several years until litigation erupted between the parties.

In 2005, while the purchase and sale agreement with Shellinger was still in effect, Cotter made efforts to sell the property to a third party.

Later, while applications for the Subdivision Map and Lot Line Adjustments were pending, Cotter attempted to simply donate the property to the City, in complete derogation of Shellinger’s rights under the purchase and sale agreement.

Finally, in a 2012 incident labeled by the trial court as “The Excavation Problem,” Cotter hired David Ruffino, a landscape contractor, to ameliorate flooding and drainage problems at the property.  The solution?  Ruffino worked without a permit and, as Cotter’s agent, dug an “unauthorized ditch” (4 feet wide and 200 feet long) that encroached into nearby sensitive wetlands.

This encroachment led to a crackdown by various agencies, resulting in substantial remediation and habitat restoration requirements and a 5 year monitoring program, putting Shellinger’s entire project into serious doubt.

According to Ruffino’s deposition testimony that was introduced at trial, Cotter also asked Ruffino to lie about the ditch and to say he knew nothing about it.  Ruffino told the truth instead, landing Cotter in hot water.

Shellinger’s Expenses

Shellinger spent 15 years and nearly $3 million in pursuing the project and attempting to complete the purchase.  The expenses included property taxes, civil engineering, fees imposed by the City and County, and other items.

Trial Court’s Judgment

The trial court ruled that Cotter breached the agreement and awarded Shellinger $2,855,431.77 in damages.

Cotter appealed.

Court of Appeal’s Opinion

The Court of Appeal addressed, and shot down, Cotter’s various arguments relating to the Subdivision Map Act, breach, and damages.

Subdivision Map Act

Citing to Sixells, LLC v. Cannery Business Park (2008) 170 Cal.App.4th 648 (one of my old cases), Cotter argued that Shellinger could not legally waive the final subdivision map condition of the purchase and sale agreement.

This argument might have been good (really good and potentially decisive, actually), except for one problem — it was never raised in the trial court.  As such, the Court of Appeal held the argument was waived and could not be raised for the first time on appeal.

Breach

The Court of Appeal gave short shrift to Cotter’s arguments that he did not breach the purchase and sale agreement.

The Court pointed to the trench dug by Cotter’s contractor and the ensuing remediation problems as a clear breach of Cotter’s contractual obligation to not permit any act of waste that would diminish the value of the property.  The Court rejected Cotter’s contention that “waste” only involved “permanent” damage.  The language of the agreement and the context confirmed that the parties used “waste” in a broader sense, including any act or omission that would substantially impair the value or utility of the property.

The Court also held that Cotter’s bad faith — a “recurring theme” — could be taken into account.  Cotter failed to pay the property taxes (an act alone sufficient to cause waste), refused to assist with completing the Lot Line Adjustments, negotiated to sell the property to a third party, and offered to give the property to the City — all without any regard to Shellinger’s contractual rights.

The Court held, “In short, Cotter wrecked the project for Shellinger.”

Damages

The Court of Appeal upheld the trial court’ award of damages under Civil Code section 3306.

Section 3306 allows for various damages in the event of a breach of a purchase and sale agreement, including the price paid, title and escrow expenses, the difference between the agreed price and the value of the property at the time of breach, and, most importantly here, “the expenses properly incurred in preparing to enter upon the land” along with consequential damages.

The Court acknowledged that the purchase and sale agreement was “not your run-of-the-mill contract for the sale of real property” and, for that reason, the expenses incurred by Shellinger were larger than typical.

But the Court found that Shellinger and Cotter were both “experienced” with real estate development, and envisioned a long, open-ended escrow dependent on many factors beyond their control, including City approvals.  Both parties contemplated “extensive interaction with local government” and expected that Shellinger would shoulder the substantial expenses involved with getting the project approved before taking formal possession at the close of escrow.

As such, Shellinger’s expenses were “foreseeable” damages in the event of breach by Cotter.

Lesson

There are times when specific performance does not provide much relief to a jilted buyer on a purchase and sale agreement.

If, due to the seller’s breach, the property has suffered waste — whether from the imposition of tax liens for missed tax payments, or an environmental remediation disaster as in this case — the buyer can opt for damages under Civil Code section 3306.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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