Remedies for Nonbreaching Party
• Rescission
• Damages (actual damages, or, if contract so
provides, liquidated damages)
• Specific performance
• Vendor’s lien (breach by purchaser)
• Vendee’s lien (breach by seller)
Vendor’s Lien [Note 6, p. 61]
• If Seller delivers title to land but Buyer fails to pay,
Seller has a common law vendor’s lien to secure
payment of unpaid purchase price
– Example: Buyer pays with a check that “bounces”
– Land may be sold in judicial sale to satisfy lien
• If Buyer resells land to a BFP, BFP would take free of
vendor’s lien (again, Seller should seek lis pendens)
Vendee’s Lien [Note 5, p. 61]
• If the Seller breaches a contract for the purchase of
land but does not return earnest money deposited by
the Buyer, the Buyer has a common law vendee’s lien
on the land to secure repayment of the earnest money
– Land can be sold in a judicial sale to satisfy the lien
• If Seller resells land to a BFP, BFP would take free of
vendee’s lien (Buyer should assert lis pendens to avoid
this result)
Expectation Damages
• Nonbreaching party may recover expectation damages to
compensate for party’s “lost bargain”
– Measure of damages for the nonbreaching Seller = Contract Price
MINUS Fair Market Value of land at time of breach
– Measure of damages for the nonbreaching Buyer = Fair Market
Value of land at time of breach MINUS Contract Price
• Suppose Seller and Buyer have contract (price = $200K) and
Buyer breaches. How does Seller establish the amount of its
expectation damages?
Expectation Damages
• To recover expectation damages, nonbreaching Seller must
prove that FMV of land was lower than the contract price
• FMV is typically determined by appraisal, based on one or
more of three measures of value
– (1) Replacement cost (i.e., cost of rebuilding)
– (2) Income approach (i.e., based on present value of projected
future net cash flow)
– (3) Comparable sale price approach (i.e., value extrapolated by
reference to recent sales of “comparable” properties)
Illinois Land Trust
• The form of ownership in Schwinder is a special
statutory form of ownership in Illinois — the land trust
• In a land trust, legal title is held by a trustee
– But, the trust beneficiary has full control over the
management of the property, and also has the right to
possession of the property
– The trustee has no real duties (no active management), but
just appears as the “record” owner
Consequential Damages
• Nonbreaching party may also recover consequential or
“out of pocket” damages to reimburse that party for
foreseeable expenses incurred in relation to the contract
– E.g., Buyer breaches but Seller incurs cost of broker’s
commission
– E.g., Seller breaches but Buyer incurs cost of title investigation
Land Trust: Advantages?
• Anonymity/privacy
– Beneficiary’s name doesn’t appear on public records
• Ease of transfer
– Beneficiary can transfer ownership w/out delivery of a deed
(transfer by assignment of the beneficial interest in the trust)
– Traditionally used by seller to avoid real estate transfer tax (but IL
statutes have been “fixed” this problem) to preserve transfer tax
revenues
Centex Homes v. Boag
• In 1974, the New Jersey Supreme Court held that a
condo developer could not obtain specific performance
against a buyer that breached a contract to purchase a
condo unit
– Court: unit was one of more than 100 identical units in the
development; seller could readily establish damages based on
contemporaneous sales of other units
– Thus, seller’s legal remedy (damages) was adequate
Schwinder v. Austin Bank of Chicago [p. 55]
• Schwinder contracted to buy condo
unit from Baginski
– When Baginski refused to close,
Schwinder sought specific performance
of the contract
• Based on the rationale expressed in
Centex Homes v. Boag, why not let
Baginski breach the contract and pay
damages to Schwinder?
• Schwinder court holds: condo was sufficiently “unique” to
justify an award of specific performance, and Schwinder’s
legal remedy (damages) was not adequate [p. 58]
• Concern: Schwinder may have difficulty proving
expectation damages
• Suppose that instead, Schwinder had contracted to buy the
condo unit “as is” (no upgrades), and he had not yet taken
possession of the unit. Would he still get specific
performance?
• Concern: Schwinder may have suffered consequential
damages that might have been unforeseeable (and thus
not recoverable)
– Condo unit had been upgraded to Schwinder’s specifications
– Schwinder had spent 2 years living in the residence
– These factors demonstrated “uniqueness” of unit to Schwinder as
the Buyer
– If FMV of condo unit has not changed relative to contract price,
Schwinder may not have incurred expectation damages at all
– Schwinder may value the unit, subjectively, at a price not
reflected in the FMV, but this “intrinsic lost bargain” is not
recoverable under contract law
Specific Performance: Buyer
• Nearly all courts hold that when the Seller breaches, the
nonbreaching Buyer can obtain specific performance
(as long as that is possible and not inequitable)
• From buyer’s perspective, any parcel of land is unique
(no perfect substitute)
– This may even be true for a condo unit (a 7th floor condo may
not be a perfect substitute for a 10th floor condo unit, even if
they were of identical size/layout)
Specific Performance: Seller
• Problem 4: Buyer breaches contract
because Buyer can’t get a loan
• In this circumstance, does it make
sense for the Seller to seek specific
performance? Why or why not?
Specific Performance: Seller
• Notwithstanding Centex Homes v. Boag, most courts
award specific performance to sellers, too
• Rationale: Damages are based on FMV on date of
breach, but Seller can’t immediately “cover” (resale
takes time)
– Seller must establish value by appraisal, which can be highly
subjective (e.g., what properties are “comparable”)
– Risk of judicial error in appraisal of value is mooted if Seller
can get specific enforcement
• If Buyer has no other readily accessible assets from which
to pay full purchase price, it makes no sense for Seller to
seek specific performance
– Seller would get judgment vs. Buyer, but would have to tender
deed, and then would have to enforce judgment by forcing an
execution sale of the land!
• By contrast, if Buyer has other readily accessible assets
from which it could pay purchase price, Seller might
choose specific performance (to avoid uncertainty
associated with having the re-sell the land)
Donovan v. Bachstadt
• Bachstadt breached contract to sell land to Donovan
because Bachstadt’s title turned out to be defective
• Donovan sued Bachstadt for:
– Expectation damages (FMV was >>> $58,900 contract price)
– Consequential damages (b/c when Donovan bought another
house, Donovan had to borrow at 13.25%, rather than the
10.5% rate Bachstadt had offered as seller financing)
• Is Donovan entitled to these damages?
• English rule (page 47: Seller should not be liable for
expectation damages if Seller, without his own fault, can’t
show a good title) seems to be based on the notion that
Seller can’t be expected know whether Seller has good
title at the time of contracting
• But
– Seller could obtain title report before Seller accepts an offer,
condition its title obligation on any items disclosed in that
report, and contractually limit Buyer to rescission
Expectation Damages and Title Defects
• Under the traditional common law rule (the “English Rule”), if
Seller’s breach was due to a title defect, Buyer was limited to
rescission and return of deposit
• Under the “American Rule,” nature of Seller’s breach doesn’t
matter, and Buyer is entitled to expectation damages
• Do you think the Donovan case is correct to adopt the
American Rule? What are the implications of the American
Rule for someone like Bachstadt, looking to sell a home?
The American Rule and Title Insurance
• Note: If Bachstadt’s title was defective through no fault of
his own, and he had purchased an owner’s policy of title
insurance when he bought the land, the title insurer would
have to indemnify Bachstadt against his liability to
Donovan
– Title insurance policy typically insures “marketability” of owner’s
title, and any loss suffered because owner’s title is determined
to be “unmarketable”
Donovan v. Bachstadt
• Bachstadt breached contract to sell land to Donovan
because Bachstadt’s title turned out to be defective
• Donovan sued Bachstadt for:
– Expectation damages (FMV was >>> $58,900 contract price)
– Consequential damages (b/c when Donovan bought another
house, Donovan had to borrow at 13.25%, rather than the
10.5% rate Bachstadt had offered as seller financing)
• Is Donovan entitled to these damages?
Donovan: Holding
• Buyers can’t recover
– “[A]n interest differential occasioned by seller’s default might be a
proper factor ... where the buyer shortly thereafter purchased
another property financed at a higher interest rate.” [p. 51]
– “This is not such a situation. The defendant’s motive was to sell a
house and not to lend money.” [p. 51]
• Does this result make good sense? Why isn’t the possibility
of Buyer having to borrow at a higher rate foreseeable?
• If Bachstadt had performed, Donovan’s monthly mortgage
payment ($44,000 loan, 30-year amortization, 10.5% interest
rate) would have been $402.49 per month
• The monthly payment on Donovan’s 13.25% bank loan for a
loan of the same amount was $495.34 per month
• Thus, Donovan pays an additional $1,114.20 per year in
interest, each year for 30 years
• The present value of this amount (discounted at 13.25%) =
$8,207.87
• Why shouldn’t the Seller be liable for this harm?
• The key to understanding Donovan is that the interest rate
differential was not due to post-contract market rate
fluctuations, but due to the requirements of New Jersey’s
usury statute
– State law imposed a 10.5% usury limit on purchase money
mortgage note (held by Seller) [p. 46]
– This limit did not apply to institutional (bank) financing
• Result would likely have been different if Bachstadt’s breach
had caused Donovan to lose the benefit of a 10.5% bank
loan and Donovan then had to borrow at higher rate
Donovan v. Bachstadt
• If the court had awarded Donovan both
expectation damages (K price minus
FMV) and also consequential damages
(based on interest rate differential),
Donovan probably would have gotten a
double recovery (double counting)
• Can you explain why?
• Drafting implications for consequential damages
– If one party expects to incur out-of-pocket costs that would go
beyond the “typical” out-of-pocket cost, it should negotiate for
recitals in the contract that recite/acknowledge the party has
incurred or will incur those costs
• E.g., “Seller acknowledges that Buyer has incurred $3,500 in travel
expenses in negotiating and finalizing this Contract.”
– The recital may prove useful to the nonbreaching party to help
establish that the expense in question was foreseeable to the
breaching party (and thus recoverable)
• Likely, the $58,900 contract price already reflected the
interest rate differential that resulted from Seller’s
agreement to provide financing
– B/c 10.5% seller financing enabled Buyer to acquire land for
lower monthly payments than Buyer would have paid if Buyer
had gotten institutional loan, Buyer likely agreed to pay a
higher price
– Giving Buyer consequential damages for the interest rate
differential would be “double counting” to the extent that the
differential was already reflected in the contract price
Liquidated Damages: Orr v. Goodwin
• Contract for sale: price = $1,020,000; deposit = $25,000
– Contract provided: “LIQUIDATED DAMAGES: If the Buyer shall
default in the performance of their obligation under this agreement,
the amount of the deposit may, at the option of the Seller, become
the property of the Seller as reasonable.” [p. 63]
• After Buyer breached, Seller kept the deposit, but later filed
suit for consequential damages that exceeded the $25,000
deposit amount (incl. carrying costs of land, such as taxes)
Liquidated Damages and Orr v. Goodwin
• Court holds that by retaining the
deposit, Seller had opted for liquidated
damages in lieu of actual damages
• Liquidated damages clause was valid,
so deposit was Seller’s only remedy
• Is this result appropriate?
Court’s Reasoning: Orr v. Goodwin
• No “punishment” or “penalty” involved in enforcing clause
• $25,000 was a reasonable pre-estimate of possible damages
• Sellers had re-listed property for $1 million ($20,000 less
than agreed price), suggesting that $25,000 damages are
not “grossly disproportionate” to liquidated amount
• If Sellers wanted to preserve their right to pursue actual
damages, they had to return deposit
Liquidated Damages
• Restatement (2d) of Contracts § 356: clause liquidating
damages is valid if:
– (1) parties intended to agree in advance to liquidate damages
in case of breach;
– (2) at time of contract, liquidated amount is a reasonable preestimate of possible damages
– (3) actual damages would be uncertain in amount and difficult
to prove
Liquidated Damages and Orr v. Goodwin
• Court appears to suggest that if the
Seller had returned the Buyer’s
$25,000 deposit, the Seller could have
then sued to recover its actual
damages (if greater than $25,000)
• Is that appropriate?
Can Liquidated Damages Be Optional?
United
Nations
HQ
Trump
World
Tower
• Restatement: parties must’ve intended to liquidate damages
• If the Seller can waive the deposit and sue for actual damages
instead, arguably the Seller didn’t intend to liquidate damages!
• Lefemine v. Baron (Fla. 1991): such an optional clause is not
valid, but an unenforceable penalty (b/c the only time Seller
would enforce it is when it exceeds Seller’s actual loss and
would thus exact a penalty for breach)
• Contra: Reiter v. Bailey (Wash. 1934); Hoelscher v.
Schenewerk (Mo. 1991): option to seek actual damages does
not defeat validity of liquidated damages provision
Trump World Tower: 86th Floor Penthouse Unit
Uzan v. 845 UN Ltd. Pship.
Trump World Tower: 86th Floor Penthouse Unit
• Uzans signed K to buy 4 condo units, price = $32MM,
cash deposit = $8MM
• After 9/11, Uzans refused to close
• K: on default, Seller “shall have the right to retain, as and
for liquidated damages, the Down payment”
• Uzans: Seller suffered no actual harm, so retention of
deposit = penalty [Stabenau and Alteka, note 3, p. 69]
Uzan — Liquidated Damages
• Question: At time the parties entered
into the contract, was $8MM a
reasonable “pre-estimate” of Seller’s
potential damages if Buyers
breached?
• Realistically, could Seller’s damages
have been that high? If so, how?
Liquidated Damages
• Most courts enforce 10% deposit clause as reasonable, even if
the Seller did not suffer any actual loss
• Potential damages could include:
–
–
–
–
Short-term market price reductions
Re-sale costs (liability for broker commission)
Other out-of-pocket costs, incl. attorney fees
Carrying costs (e.g., taxes) pending re-sale
• What about a 25% deposit?
Liquidated Damages
• Some states have adopted statutory limits, applicable mostly
to residential contracts
– E.g., in California, the Seller can keep a 3% deposit as liquidated
damages (up to 3% is presumed valid, conclusively) [Cal. Civ.
Code § 1675]; however, a deposit greater than 3% is presumptively
unreasonable, unless Seller can prove otherwise
– E.g., in Washington, 5% deposit is presumed reasonable estimate
of liquidate damages, conclusively [Wash. Rev. Code Ann. § 64.04]
• Argument: deposit amount can be viewed as Buyer
purchasing an “option” to terminate the K
– Option contracts are customarily enforced in accordance with
their terms (no “reasonableness” analysis of option price)
• But, in Uzan, the contract did not characterize the deposit
as an “option”; instead, it characterized retention of the
deposit as “liquidated damages”
• Drafting: if seller wants to negate having contract
analyzed using liquidated damages analysis, it should
draft deposit as explicit “option agreement” instead and
characterize amount as the “option price”
• Note, however, that ultimately the Uzan court did not
evaluate this deposit clause using liquidated damages
analysis
– Court: for a real estate contract deposit, Seller does not have
to show “the stipulated damages bear a reasonable proportion
to the probable loss caused by the breach” [p. 4]
– Liquidated damages analysis not necessary for real estate
contract deposit
• Was this an appropriate decision? Why or why not?