Real Estate Finance Notes 8/27/04

 

Specific performance

 

This is a great, powerful remedy!It allows you to hold someoneís 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 canít purchase another home during the suit, since most people canít 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, itís hard to sell the property when a suit is going on and specific performance is being sought.An aside: ďlis pendensĒ 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 Ohio, you simply must serve the summons on the adverse party and the doctrine kicks in.Then changes in title after that date will have no effect on the ultimate judgment.

 

Centex Homes v. Boag

 

Thereís this huge condo complex.Whatís a condo?You own ďfrom the paint inwardĒ in fee simple.From the paint outward, thatís 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 didnít 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 Braunsteinís opinion.Itís much easier for the vendee to get specific performance than it is for the vendor.So what if Centex had told the Boags that theyíre 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!Itís just that they get a different (presumably higher) amount of money than they would get with their remedy at law.So from the vendeeís perspective, land and money arenít fungible.But the vendor gets money either way.So the uniqueness of land argument doesnít seem to make much sense in this case, and it doesnít seem to make much sense in the general case.Why should the vendor get specific performance?How about the idea that itís 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 doesnít think itís a strong argument.The court in this case says that itís enough to have mutuality of obligation.They say that as long as the contract is not illusory, that is, both parties have obligations, then thatís enough in terms of treating the parties fairly.But the method by which we enforce those obligations doesnít 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 itís 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 vendorís 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.Whatís the sellerís argument?He argues that the damages provided for in the agreement arenít his exclusive remedy.He says that if you construe the clause the way the court did, itís 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 wasnít a penalty at all.It will be tough to get a liquidated damages clause thrown out for being too low!Youíre trying to say that itís a penalty because itís too low.

 

But what if itís too high?Then itís probably out.But when is it too high?When itís 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 whatís 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, youíre brining a suit to enforce the contract.Thatís every bit as much an enforcement action, according to Braunstein, as is a suit for specific performance.Canít we interpret the contract to mean that the seller gets liquidated damages or else can sue for more if the liquidated damages arenít enough?

 

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