Los Angeles Real Estate Contracts
What Are Some Damages in Breach of Los Angeles Real Estate Contracts? It often happens parties fail to fully perform their contractual obligations in sale of real estate. Often, the most immediate consequence of such contractual breach is the nature and amount of damages, if any, PLUS other conceivable remedies available at law and in equity. Let us explore, to some extent, some detail of such damages.
1. “GENERAL” LOSS OF BARGAIN DAMAGES
The standard measure of loss of bargain damages, for a TOTAL BREACH, would encompass the difference between the agreed contract price and the market value of the property on the date of breach. For instance, if a property was sold for $100,000 and at the time of the total breach by buyer, the property was worth $60,000, then the seller – as the non-breaching party – would presumably be entitled to $40,000 in losses. Likewise, if the value of the property had risen to $140,000 on the date of breach, if the seller is in total breach, the buyer is entitled to $40,000.
SOME NOTES FOR LOSS OF BARGAIN DAMAGES
Loss of bargain damages is not as straightforward as it seems. In fact, the following scenarios illustrate the gulf of opinion on some seemingly straightforward situations.
A. Future Market Fluctuations, Generally, Irrelevant in Loss of Bargain Damages
What is astonishing in loss of bargain damages is the irrelevance of future real estate fluctuations, generally, in a total breach by a seller. This means, generally, if the purchaser in the above example has to purchase a property after the seller’s total breach for $150,000, the purchaser – the non breaching party – would be out of luck. The purchaser, generally under loss of damages principle, would be entitled to only $40,000, the difference between the contract price and the market value of the property on the date of the breach.
B. Seller’s Good Faith But Inability to Convey Good Title Could Impact Recovery of Loss of Bargain Damages
Courts are sharply divided as to whether a purchaser can recover loss of bargain damages when the seller acted in good faith but was unable to convey satisfactory title. Almost half of the cases – in such situation – limit purchaser’s recovery to return of earnest money or other payments with interest PLUS other incidental damages such as abstract, title examination and loan application costs.
2. “SPECIAL” DAMAGES
There are two categories of special damages which non-breaching party could recover. Both of these damages MUST satisfy foreseeability test. Foreseeability in this context means such damages were within the contemplation of the contract when made.
A. EXPENSES IN RELIANCE ON LOS ANGELES REAL ESTATE CONTRACTS
The first category is those expenses non-breaching party incurred in reliance on the contract. Such expenses could include but is not limited to:
- Seller’s Eviction of an Actual Tenant
- Refurbishment of the Premises in Accordance with Contract’s Specifications
- Broker’s Commissions
- Title Search
- Examination Fees
- Document Drafting Expenses
- Traveling to and from the Property
- Moving In or Out of the Property
- Expenses for Arranging Financing
B. LOSS OF PROFIT
Often, purchasers tend to acquire real estate hoping to make profits from sale, rental, development or even flipping it. In such circumstances, the purchaser might be able to recover loss of profit in addition to loss of bargain damages and expenses, articulated above. Nonetheless, purchaser MUST overcome several obstacles, including but not limited to:
- FORESEEABILITY: The loss of profit incurred by the purchaser MUST be foreseeable, i.e. within the contemplation of parties. This requirement is extremely important and argued and contested extensively.
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- The loss of profit must be proven with reasonable, not total, certainty. Courts are typically cynical of such claims. Nonetheless, if proof is cogent, recovery might be possible.
Why and How Are Condition Precedents Salient in Los Angeles Real Estate Contracts?
Condition precedents play an integral role in protecting disparate parties in contractual transactions. Such salience comes to the fore, especially, in real estate transactions where parties do not have substantive control over financing or other requirements laid out in the contract. In the absence of well-drafted enforceable condition precedents, parties are left bereft of real protection. Let us explore, to some extent, such salient building block of contractual transactions.
Condition precedent is referred to a condition which must take place before a party to a contract has to perform. If a condition precedent does not take place, no duty of performance arises and no tender is required AND the party protected by the condition precedent is not in breach, if the party does not perform. In other words, in a real estate sales contract, if the contract encompasses a condition precedent specifying the buyer must first acquire a bank loan, and then the buyer is obligated to pay the seller, if the bank does not approve the buyer or the loan process takes longer, the buyer is not in breach, if the seller does not buy the property, with the proviso the condition precedent is enforceable.
Condition precedents in real estate contracts are not only limited to buyers. Sellers also insert a variety of condition precedents to ensure they are not bound to perform if certain conditions do not occur. For instance, sellers might need a way out of the contract without incurring any unreasonable costs, if the buyer’s credit references are not satisfactory for the seller OR if the seller cannot find real estate for 1031 tax exchange, living or other reasonable reasons.
DRAFTING AND ENFORCING CONDITION PRECEDENTS IN LOS ANGELES REAL ESTATE CONTRACTS
There are several points to consider while drafting enforceable condition precedents. The following are just a few of such considerations:
1. LENDER’S APPROVAL: “GOOD FAITH” AND “REASONABLE EFFORTS”
It is incumbent on attorneys and clients alike, to include in real estate contracts a condition precedent, i.e. conditioning the sale upon LENDER’S APPROVAL. This point seems to be easy, but often overlooked.
CAVEATS ON LENDER’S APPROVAL CONDITION PRECEDENTS
- <li “mso-margin-top-alt:auto;mso-margin-bottom-alt:auto;=”” margin-left:.75in;mso-list:l3=”” lfo3;tab-stops:list=”” .5in”=””>The condition precedent cannot be entirely in control of one party without no qualifiers. In such circumstances, there is no mutuality of obligation and NO PARTY CAN ENFORCE THE CONTRACT. Usually, the courts dislike this result and often construe the contract as to deny the party with unfettered discretion to perform the contract. A party who has failed to make a good faith effort to obtain financing, is found LIABLE even though the obligation to perform the contract as a whole has not arisen. Such breach is typically treated as a total or material breach as though the defaulting party had refused to consummate the sale itself. <li “mso-margin-top-alt:auto;mso-margin-bottom-alt:auto;=”” margin-left:.75in;mso-list:l3=”” lfo3;tab-stops:list=”” .5in”=””>To avoid the problems just set forth, contract should contain “GOOD FAITH” and “REASONABLE EFFORTS”. Nonetheless, it is insufficient if the defaulting party only invokes such principle without putting in any good faith or reasonable efforts to obtain financing.
2. VAGUENESS OF “GOOD FAITH” AND “REASONABLE EFFORTS”
Understandably, the problem arises when it comes to interpretation or construction of “good faith” or “reasonable efforts”. The reality is that how hard the defaulting party should seek financing before such efforts are deemed reasonable or in good faith. Courts are, to some extent, divided on this issue. Nonetheless, most of the courts follow SOME of the following guidelines:
- <li “mso-margin-top-alt:auto;mso-margin-bottom-alt:auto;=”” margin-left:.75in;mso-list:l5=”” lfo4;tab-stops:list=”” .5in”=””>Most courts are willing to fill in the missing terms by referring to reasonable expectations and practices in the locality. <li “mso-margin-top-alt:auto;mso-margin-bottom-alt:auto;=”” margin-left:.75in;mso-list:l5=”” lfo4;tab-stops:list=”” .5in”=””>The actual behavior of the parties might provide additional information even if the terms are indefinite or ambiguous. <li “mso-margin-top-alt:auto;mso-margin-bottom-alt:auto;=”” margin-left:.75in;mso-list:l5=”” lfo4;tab-stops:list=”” .5in”=””>A party may waive the indefinite provision. However, such waiver is effective only if the provision was inserted for the benefit of the waiving party. For financing conditions, the buyer is often deemed to be the benefiting party. Such construction might prove more problematic in non-financing condition precedent circumstance.
This article in no way supplants a thorough investigation of the facts and the law pertinent to the situation at hand. In fact, this article provides ONLY a small portion of this salient topic.
Doron F. Eghbali Real Estate Law
Timing is of paramount of importance in real estate transactions. However, not always, “time is of the essence”. In fact, there is no requirement, generally, for parties to contract about the timing of their performances. In most circumstances, if timing is “not of the essence”, then the courts infer a “reasonable time” for performance. Nonetheless, in most real estate transactions, at least one party intends to see the project consummated on a particular date not later. Let us explore, to some extent, the practical implementations of “Time is of the Essence”.
There is no set rule requiring parties to agree in the contract about the time of their performances. In the absence of any timing deadlines in the contract, courts, generally, look at a “reasonable time” for performance of promises. Reasonable time could be nebulous and could still make liable the breaching party for some damages.
In fact, in such circumstances, the non-breaching party could sue the breaching party for lost rents, profits, higher interest on the buyer’s mortgage and the like.
SOME ANOMALY IN THE ABSENCE OF “TIME IS OF THE ESSENCE”
Nonetheless, if time is not of the essence, the non-breaching party should generally, still perform. This principle is strictly complied with especially in sales of real estate where one party is late, time is not of the essence and the non-breaching party seeks to nullify the sale. In such circumstances, generally, the non-breaching party is not excused from performing. In fact, the breaching party, surprisingly, could demand specific performance OR even damages, based on some courts.
SALIENCE OF “TIME IS OF THE ESSENCE”
Given the anomaly just enunciated and the fact non-breaching party still has to wait for the breaching party for a “reasonable time” to perform, it behooves parties to make time is of the essence a condition of the contract. Hence, this is salient to ascertain what facts will make time of the essence.
SOME FACTORS TO MAKE “TIME OF THE ESSENCE”
1. “Time is of the Essence” In the Contract
It is very helpful to include “Time is of the Essence” language in the contract. Nonetheless, this could be insufficient, as there might be different deadlines for disparate performances under the contract. It might be useful to identify the language applies to what performances.
2. NO “Time is of the Essence” In Los Angeles Real Estate Contracts: Surrounding Circumstances
Even if there is no “Time is of the Essence” in the contract, surrounding circumstances might still make time is of the essence. Evidence of such surrounding circumstances could include, but not limited to:
- <li “mso-margin-top-alt:auto;mso-margin-bottom-alt:auto;=”” margin-left:.75in;mso-list:l4=”” lfo5;tab-stops:list=”” .5in”=””>If one party was concerned about prompt settlement and the other party knew about it. <li “mso-margin-top-alt:auto;mso-margin-bottom-alt:auto;=”” margin-left:.75in;mso-list:l4=”” lfo5;tab-stops:list=”” .5in”=””>If land values were changing rapidly and parties knew about concerns of the other party. <li “mso-margin-top-alt:auto;mso-margin-bottom-alt:auto;=”” margin-left:.75in;mso-list:l4=”” lfo5;tab-stops:list=”” .5in”=””>If one party made agreements depending upon the contract when the other party knew about.
This article in no way supplants thorough analysis of the facts and the law in a particular case or serves as legal advice. In fact, this article NARROWLY provides ONLY some aspects of this important topic.
Doron F. Eghbali Real Estate Law
From legal perspective, rescission of a contract is distinguishable from cancellation of a contract. Rescission reverts the contract to the day it had not been signed as if the contract had not been made. In fact, the rescinded contract becomes a nullity as if it had never existed. As such, it behooves us to ascertain how and when a contract is rescinded and what would be the legal implications of such rescission or lack thereof.
SOME BASICS OF CONTRACT RESCISSION
Contract rescission negates the existence of a contract and restores the parties to the day the contract had not been signed and obligates them to return whatever consideration had been received. Contract rescission can occur without litigation and by the assent and agreement of parties involved. Nonetheless, rescission would also be available in litigation as a remedy for lack of MUTUAL ASSENT grounds for mistake, fraud, etc. or lack of MATERIAL CONSIDERATION for an otherwise validly formed enforceable contract.
Under CA statute, a party to a contract may rescind the contract by giving notice to the other party and offering to return the consideration received.CA Civil Code Sections 1688-1693.
SOME DISTINCTIONS BETWEEN RESCISSION AND CANCELLATION OF CONTRACT
Rescission and cancellation are to some extent similar remedies yet there are salient distinctions between them.
First, cancellation is a remedy effectuated only by a court. This means only a court can order an instrument be cancelled, under the governing CA Statute (Civil Code Section 3412). On the other hand, as elucidated before, rescission can be effectuated by mutual assent of the parties themselves or through a legal action after a unilateral notice and offer to restore by the rescinding party is given.
Second, cancellation of a contract only cancels the instrument. On the other hand, rescission of a contract terminates the whole contract including the instrument.
Third, cancellation of a contract leaves the parties as they are at the time of cancellation. Nonetheless, rescission of contract require the parties to return any consideration each has received and restore them to when the contract had not been signed or made.
SOME GROUNDS FOR RESCISSION
1. Mutual Consent of Parties
The parties could rescind the contract regardless of the express terms of the contract. In fact, with mutual consent or assent of parties, no grounds are needed to rescind.
It is important to note, when parties agree to mutually rescind a contract, a binding agreement to rescind is created. Such binding agreement is effective even if one of the parties later changes mind. The problem is often parties do not mutually consent to rescind or rescission is impossible since parties have to return in full their consideration to the other party.
2. UNILATERAL MISTAKE
An agreement may be rescinded if the rescinding party’s assent was predicated on a mistake in fact or law the non-rescinding party knew about or suspected of yet took advantage of such mistake. In the past, there must have been a mutual mistake of the parties for rescission. However, the recent trend seems to allow unilateral mistake when the non-rescinding party shares the misunderstanding, contributes to it by misrepresentation, EVEN IF innocently.
Nonetheless, unilateral mistake may NOT be a basis for rescission when the rescinding party could have ascertained the mistake by reasonable due diligence. In addition, some courts have held unilateral mistake in value and quantity are not material since parties assume these risks when entering into an agreement.
When a party has been induced to enter into a transaction, the defrauded party can rescind the contract and seek restitution for the lost profits.
Fraud could be constructive or actual.
A. CONSTRUCTIVE FRAUD
Constructive fraud is when one party gains advantage over another. Constructive fraud could be predicated on a fiduciary relationship between the parties, when such relationship requires full disclosure. Constructive fraud could also be predicated on when one party uses superior knowledge to gain an UNREASONABLE advantage.
B. ACTUAL FRAUD
Actual fraud could be predicated, among other things, upon:
- <li “mso-margin-top-alt:auto;mso-margin-bottom-alt:auto;=”” margin-left:.75in;mso-list:l0=”” lfo6;tab-stops:list=”” .5in”=””>A suggestion of a fact to be true when the one making it does not believe it to be true. <li “mso-margin-top-alt:auto;mso-margin-bottom-alt:auto;=”” margin-left:.75in;mso-list:l0=”” lfo6;tab-stops:list=”” .5in”=””>A suggestion or assertion to be true when the one making it does not have a reasonable basis for it to be true. <li “mso-margin-top-alt:auto;mso-margin-bottom-alt:auto;=”” margin-left:.75in;mso-list:l0=”” lfo6;tab-stops:list=”” .5in”=””>A concealment or nondisclosure of a fact by the one with knowledge or belief in the fact. <li “mso-margin-top-alt:auto;mso-margin-bottom-alt:auto;=”” margin-left:.75in;mso-list:l0=”” lfo6;tab-stops:list=”” .5in”=””>A promise but the one making it has no intention of performing it.
This article NEITHER supplants NOR supplements the breadth and depth of such esoteric subject matter. In fact, this article ONLY provides a rudimentary synopsis of such esoteric expansive subject matter.
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