Real
Estate Finance Notes
Specific performance
This
is a great, powerful remedy! It allows
you to hold someone’s feet to the fire.
If the vendor sues for specific performance, it means that the vendee
has to keep prepared to purchase the property while the suit is pending. They must keep their financing in line. They probably can’t purchase another home
during the suit, since most people can’t afford to have two of them. In terms of negotiating, the ability to get specific
performance is very powerful for the vendor, just as it is for the vendee. The vendee can essentially force the vendor
not to sell to anyone else. Anyone who
buys would buy subject to the pending suit.
If the vendee gets specific performance, the person who purchases while
the suit is on will lose it. Thus, it’s
hard to sell the property when a suit is going on and specific performance is
being sought. An aside: “lis pendens”
means pending litigation. Once a lawsuit
is filed and you take advantage of this doctrine, then the judgment relates
back to the date the lawsuit was filed.
Sometimes you have to give notice to trigger the doctrine, but in
Centex Homes
v. Boag
There’s
this huge condo complex. What’s a
condo? You own “from the paint inward”
in fee simple. From the paint outward,
that’s all common areas and owned by someone else. So you have some of the advantages of
ownership combined with some of the advantages of renting. The Boags take a pretty strong approach when
Mr. Boag gets transferred. Why didn’t
they try to negotiate something? What
does Centex want? They want specific
performance, or, in the alternative, they want to keep the earnest money as liquidated
damages.
Why
might the vendee be granted specific performance in a case like this? All property is considered unique in the eyes
of the law. But are these units unique? Is that self-evident? Some land may be suited to only one purpose
or has attributes that make it different from all or most other land. But this rationale is not really factually
supported, in Braunstein’s opinion. It’s
much easier for the vendee to get specific performance than it is for the vendor. So what if Centex had told the Boags that
they’re out of luck, and so the Boags sue for specific performance? Would the result have been different?
At
the end of the day, if you order specific performance, what does the vendor
get? They get money anyway! It’s just that they get a different (presumably higher) amount of
money than they would get with their remedy at law. So from the vendee’s perspective, land and
money aren’t fungible. But the vendor
gets money either way. So the uniqueness
of land argument doesn’t seem to make much sense in this case, and it doesn’t
seem to make much sense in the general case.
Why should the vendor get specific performance? How about the idea that it’s only fair that
each side should have the same remedies?
If one person can get it, it seems like the other person ought to be
able to get it. This argument has some
force and appeal, but Braunstein doesn’t think it’s a strong argument. The court in this case says that it’s enough
to have mutuality of obligation. They
say that as long as the contract is not illusory, that is, both parties have obligations, then that’s enough in terms
of treating the parties fairly. But the method by which we enforce those
obligations doesn’t necessarily have to be the same.
The
damage remedy may not fully compensate the vendor because there are things that
are not included, or else it is hard to compute what the damages were. It may also be the case that it’s hard to
determine the market price of the property.
The property may be illiquid: maybe no one will want to buy it. We might say that when the vendor decides to
sell, all of the vendor’s risks are bargained away to the vendee. When you force the vendor to seek damages,
you place those risks back on them.
Mahoney v.
Tingley
Cheap
property here! The buyer breaches the contract
and the seller wants damages. What does
the buyer say? The seller gets to keep
the $200 deposit. What’s the seller’s
argument? He argues that the damages
provided for in the agreement aren’t his exclusive
remedy. He says that if you construe the
clause the way the court did, it’s a penalty and thus against public policy. That means he gets to sue for his actual damages, not liquidated damages
as set forth in the contract. The court
says the liquidated damages clause wasn’t a penalty at all. It will be tough to get a liquidated damages
clause thrown out for being too low! You’re
trying to say that it’s a penalty because it’s too low.
But
what if it’s too high? Then it’s
probably out. But when is it too high? When it’s way out of line with actual damages
and you could have figured out actual damages ahead of time. You calculate as of the time the parties
enter into the contract. The thing that actually seems to drive the courts is
whether you did a reasonable
pre-estimate of what the damages would be if there were a breach. So what’s
called a penalty seems to depend to a large extent on the custom in the community. If a 10% deposit is customary, then a clause
that requires forfeiture of that deposit will be upheld, but forfeiture of a
20% deposit will be held to be against public policy.
Does
the court screw this case up? Does the court
interpret the agreement properly? The court
interprets this agreement as an election between liquidated damages and specific
performance. The property had already
been sold, so the vendor no longer owned the property. Specific performance is no longer
possible. Then the court says that the
only remedy available is liquidated damages.
But is that what the contract really says? Arguably not.
You can enforce an agreement by seeking damages, right? It seems to Braunstein that the court kind of
went off on a tangent. When you bring a
suit for damages, you’re brining a suit to enforce
the contract. That’s every bit as
much an enforcement action, according to Braunstein, as is a suit for specific
performance. Can’t we interpret the contract
to mean that the seller gets liquidated damages or else can sue for more if the
liquidated damages aren’t enough?