What Happens to the Property in a Failed Real Estate Transaction?

March 9, 2013

Contracts are cancelled all of the time. While it is not ideal, it is important know the potential outcomes for a breached real estate contract. Real estate contracts are different from other types of contracts because all pieces of real estate are treated as unique. This means if you were attempting to purchase real estate and the court finds that the seller breached the contract, instead of monetary compensation for the breach you can ask for the contract to be enforced and the sale completed.

Take the case of Troy Shadian, co-owner of Real Estate Analytics, LLC ("REA"). REA attempted to purchased investment property from Theodore Tee Vallas ("Vallas"). Vallas's father handled aspects of the Vallas properties except for signing contracts. REA negotiated with Vallas's father and when a deal was formed, Vallas signed the agreement. REA and Vallas agreed to an escrow date but REA asked to move it on two occasions. The first time, the contract was amended to take the new escrow date into account. The second time, the date was only agreed to orally by Vallas's father. In the time leading up to the third escrow date they regularly met and the father behaved as though the escrow extension was ok. Two weeks before escrow was supposed to close, Vallas's father contacted everyone involved and cancelled escrow and the entire contract. This led REA to sue Vallas in superior court for specific performance of the real estate contract.

To obtain specific performance after a breach of contract, a plaintiff must generally show: (1) the inadequacy of his legal remedy; (2) an underlying contract that is both reasonable and supported by adequate consideration; (3) the existence of a mutuality of remedies; (4) contractual terms which are sufficiently definite to enable the court to know what it is to enforce; and (5) a substantial similarity of the requested performance to that promised in the contract. Under California law, there is a presumption that a monetary damage award is generally an inadequate remedy for a breach of real estate contract, and therefore courts routinely grant a plaintiff's request for specific performance. In some cases the presumption is conclusive, but in the case of commercial real estate there is a rare possibility that damages are acceptable. But it is the responsibility of the defendant to prove it.

The superior court found that because the plaintiff intended to use the property for investment purposes, monetary damages was enough. REA appeal the case and the appeals court overturned the superior court's findings. The appeals court found that the property was unique not only because of its physical attributes and location, but also because of its investment potential and the reasonableness of the agreed-upon contract price. Also, the appellate court found that the superior court did not get enough evidence from Vallas proving that money would be an adequate remedy.

All of these matters are quite complicated and having an attorney on your side can make the process easier to navigate. If you have a real estate issue and are in the the Sacramento area, call our experienced Sacramento business attorney.