Court of Appeals Adopts “Fair Market Value at the Time of Breach” Rule to Measure Damages in a Contract of Sale absent Liquidated Damages.

Litigation

The Court of Appeals has recently adopted the “fair market value at the time of breach,” rule for measuring a seller’s damages when a buyer breaches a real estate contract. This rule has consistently been endorsed by all four departments of the Appellate Division, but up until recently, has never been considered by the Court of Appeals. In White v. Farrell, the court declared that the proper method to measure a sellers damages for a buyer’s breach of a contract to sell real property in the absence of a liquidated damages provision is the difference, if any, between the contract price and the fair market value of the property at the time of the breach; a.k.a. the “fair market value at the time of breach” rule.

White involved an action by the plaintiff (buyer) for breach of contract, fraudulent inducement and negligent misrepresentation against the defendant (seller) to recover a $25,000 down payment on a contract of sale for the purchase of defendant’s newly constructed lakeside home in Skaneateles, NY. Defendants counterclaimed for breach of contract demanding $348,450 in actual damages (the difference between the original contract price of $1.75 million agreed to by the plaintiff’s and the eventual sale price of $1,376,550) and $217,636.88 in consequential damages (the alleged sum of mortgage and tax payments made on the property from date of breach to closing with the ultimate purchaser).

The defendants argued that the Supreme Court should have measured damages by calculating the difference between the original contract price and the subsequent lower contract price applying a principle articulated by the Third Department in Di Scipio v. Sullivan which stated in dictum that

[T]he measure of damages incurred as a result of a breach of a real estate contract is either the difference between the contract price and a subsequent lower price or, where no subsequent sale has occurred, the difference between the contract price and the market value of the property at the time of breach. 30 A.D.3d 677 (3rd Dept 2006) (emphasis added).

The Court of Appeals rejected the defendant’s argument and instead adopted the “fair market value” rule which the court found to be the rule followed in all four departments in the Appellate Division as evidenced by the catalogue of cases cited by the Court of Appeals in its decision. (2013 N.Y. Slip. Op. 01870, pgs 11-17).  The court held, in pertinent part,

The time-of-the-breach rule is longstanding in New York [and] seems to be the rule everywhere in the United States…and is consistent with the general contract principles that damages ‘are properly ascertained as of the date of the breach,’ and ‘the injured party has a duty to mitigate.’ (2013 N.Y. Slip. Op. 01870, pg 17).

The court went on to state,

This is not to say that resale price is irrelevant to the determination of damages; in fact, the resale price, in a particular case, may be very strong evidence of fair market value at the time of the breach. This is especially true where the time interval between default and resale is not too long, market conditions remain substantially similar, and the contract terms are comparable. (Slip. Op. No. 43, pg. 18).

On remand, the Court of Appeals instructed the lower court to consider the following factors relevant to damages: (1) whether the resale value in January 2007 for $1,376,550 reflects fair market value as of October 2005 (time of breach) given the lapse of time and any difference in market conditions and contract terms and (2) whether the defendant’s (sellers) made sufficient efforts to mitigate damages (i.e. resell at a reasonable price after the plaintiff’s default).

Click here for a link to the decision.

The author acknowledges Nicholas J. Cappadora, J.D. for his contribution to this article.

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