New York Law Review

Tag: fair market value

  • White v. Farrell, 20 NY3d 486 (2013): Damages for Buyer Breach of Real Estate Contract

    White v. Farrell, 20 N.Y.3d 486 (2013)

    The proper measure of damages for a buyer’s breach of a real estate contract is the difference between the contract price and the fair market value of the property at the time of the breach; the price obtained on a later resale is competent evidence of fair market value.

    Summary

    The Farrells sued the Whites for breach of contract after the Whites backed out of an agreement to purchase the Farrells’ lakefront property for $1.725 million. The Farrells sought damages for the difference between the contract price and the eventual sale price to a third party ($1,376,550), plus consequential damages. The New York Court of Appeals clarified that the appropriate measure of damages is the difference between the contract price and the fair market value at the time of the breach. The resale price is evidence of the fair market value. The court reversed the lower court’s decision, which had granted summary judgment to the Whites based solely on the testimony of the Farrell’s real estate agent that the market value at the time of breach equaled the contract price. The case was remanded for a determination of the property’s fair market value at the time of the breach.

    Facts

    The Farrells contracted to sell their Skaneateles, NY lakefront property to the Whites for $1.725 million in June 2005. The contract was contingent on a satisfactory home inspection, resolution of construction-related items, and attorney approval. An addendum removed contingencies in exchange for the Farrells completing enumerated tasks, including drainage system work and a $10,000 credit. The Whites terminated the contract in July 2005, citing unresolved drainage issues. The Farrells sent a time-is-of-the-essence letter, but the Whites did not attend the scheduled closing. The Whites purchased another property on Skaneateles Lake for $1.7 million in August 2005.

    Procedural History

    The Whites sued the Farrells to recover their $25,000 down payment. The Farrells counterclaimed for breach of contract. Supreme Court granted summary judgment to the Whites, determining the Farrells suffered no actual damages because their real estate agent testified the property’s market value at the time of breach equaled the contract price. The Appellate Division affirmed. The Court of Appeals granted the Farrells leave to appeal.

    Issue(s)

    Whether the proper measure of damages for a buyer’s breach of a real estate contract is (1) the difference between the contract price and a subsequent lower sale price, or (2) the difference between the contract price and the fair market value of the property at the time of the breach.

    Holding

    No, the proper measure of damages is not always the difference between the contract price and a subsequent lower sale price. Yes, because the proper measure of damages is the difference between the contract price and the fair market value of the property at the time of the breach. The resale price is evidence of the fair market value.

    Court’s Reasoning

    The Court of Appeals rejected the argument that a seller’s damages are always the difference between the contract price and a later, lower selling price. The Court affirmed the established rule in New York and most jurisdictions is that damages are measured by the difference between the contract price and the fair market value at the time of the breach. The Court noted the resale price is competent evidence of fair market value at the time of breach, particularly when the resale occurs soon after the breach under similar market conditions. The Court emphasized that damages are properly ascertained as of the date of the breach, and the injured party has a duty to mitigate damages. Regarding the real estate agent’s testimony, the Court found that fair market value is a question of fact. In this case, there was conflicting evidence, including the subsequent sale price. The Court remanded the case for a determination of fair market value, considering the resale price, mitigation efforts, and costs to remedy property deficiencies. The court stated, “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.”

  • Marine Midland Properties Corp. v. Srogi, 60 N.Y.2d 885 (1983): Using Actual Rent vs. Fair Market Rent in Property Valuation

    Marine Midland Properties Corp. v. Srogi, 60 N.Y.2d 885 (1983)

    Actual rent is not necessarily indicative of fair market rental value for property tax assessment purposes, especially when the landlord and tenant are affiliated companies and the rent is arbitrarily set.

    Summary

    Marine Midland Properties Corp. challenged the tax assessments on its bank and office building, leased to its affiliate, from 1975-1979. The dispute centered on whether the actual rent charged to the affiliate should be used to determine the property’s value using the income capitalization method, or whether a lower, fair market rental figure was more appropriate. The Court of Appeals affirmed the Appellate Division’s decision, holding that the actual rent was not indicative of fair market rental value because it was arbitrarily set between affiliated companies. The court emphasized that comparable rents used for valuation must have probative value and relate to true market conditions.

    Facts

    Marine Midland Properties Corp. owned a bank and office building in Syracuse, New York.

    The property was leased to an affiliated company of Marine Midland.

    The City of Syracuse assessed the property’s value for tax purposes from 1975-1979 using the income capitalization method, relying on the actual rent charged to the affiliate.

    Marine Midland argued that the actual rent was higher than the fair market rental value and presented evidence of comparable rents from similar facilities.

    The city’s expert used the higher actual rent paid by the affiliate and compared it to rents paid by other branch banks.

    Procedural History

    Marine Midland challenged the tax assessments in court.

    The trial court accepted the city’s valuation based on the actual rent.

    The Appellate Division modified the judgment, finding the actual rent was a cost calculation unrelated to fair market rental value, and accepted Marine Midland’s evidence of true rental value, arriving at a value between the two parties’ estimates.

    The City of Syracuse appealed to the Court of Appeals.

    Issue(s)

    Whether the Appellate Division properly reversed the findings of value made by the trial court.

    Whether, in applying the income capitalization method for property tax assessment, the actual rent charged to an affiliated tenant should be used, or whether a fair market rental value should be determined using comparable properties.

    Holding

    Yes, the Appellate Division’s findings more closely aligned with the weight of the evidence.

    No, because actual rent is not necessarily indicative of fair market rental value when the landlord and tenant are affiliated and the rent is arbitrarily set.

    Court’s Reasoning

    The Court of Appeals affirmed the Appellate Division’s decision, emphasizing that when the Appellate Division reverses a trial court’s valuation findings, the Court of Appeals determines which is in accord with the weight of the evidence. Citing Grant Co. v Srogi, 52 N.Y.2d 496, 510-511.

    The court acknowledged that while actual rent may indicate fair market rental, it is not definitive when the rent is arbitrarily set, especially between affiliated companies. Citing Matter of Merrick Holding Corp. v Board of Assessors, 45 N.Y.2d 538, 543.

    The court found that the Appellate Division’s conclusion that the rent charged to the affiliate was influenced by factors unrelated to market value was supported by the weight of the evidence.

    The court also agreed that the comparable rents relied upon by the city lacked probative value because they did not accurately reflect market conditions.

    The court emphasized the importance of using reliable and relevant data when determining fair market value for property tax assessment purposes, particularly when dealing with affiliated entities.

  • Farash v. Smith, 59 N.Y.2d 952 (1983): Weight of Loan and Partnership Agreements in Property Tax Assessment

    Farash v. Smith, 59 N.Y.2d 952 (1983)

    Evidence of loans and partnership agreements, while relevant, is not determinative of fair market value in property tax assessment cases, particularly when appraisers do not rely on them and other factors influence their terms.

    Summary

    Farash v. Smith concerns a dispute over real estate tax assessments for two apartment complexes. The petitioner challenged the town’s assessments, arguing they were too high. Both parties presented appraisal evidence valuing the properties lower than the town’s assessment. The trial court reduced the assessments, but the Appellate Division reinstated the town’s figures, placing significant weight on partnership agreements and construction loans. The Court of Appeals reversed, holding that while such evidence is admissible, it’s not entitled to “greatest weight” in determining fair market value, especially when appraisers primarily rely on the capitalization of income method and other factors influenced the loan and partnership terms. The court reinstated the trial court’s reduced assessments.

    Facts

    Max Farash, acting as an agent for real estate partnerships, challenged the real estate tax assessments on two apartment complexes, Highview Manor I and Highview Manor II, in Perinton, NY. Farash contributed land for the complexes, receiving a 50% partnership interest. Other partners contributed cash, receiving the remaining 50% interest. Construction was financed through loans. The town assessed Highview Manor I for $2,197,250 and Highview Manor II for $1,835,800 for the tax years in question.

    Procedural History

    The petitioner initiated proceedings under Article 7 of the Real Property Tax Law to review the assessments. A referee heard the case and both sides presented appraisal evidence. The trial court adopted the referee’s findings, reducing the assessments. The Appellate Division reversed, reinstating the town’s original assessments. The case then went to the New York Court of Appeals.

    Issue(s)

    Whether the Appellate Division erred in reinstating the town’s tax assessments based primarily on partnership agreements and construction loans, rather than giving greater weight to the capitalization of income approach used by both appraisers.

    Holding

    Yes, because while evidence of loans advanced on property during or near a particular tax status date may be considered, such evidence standing alone is not entitled to “greatest weight” because the reasons behind the terms and amount of the loan may be uncertain and unrelated to market values.

    Court’s Reasoning

    The Court of Appeals found that the Appellate Division erred in treating the partnership agreements and construction loans as evidence of arm’s length sales entitled to the “greatest weight.” The court reasoned that while such evidence can be considered, it shouldn’t be the primary basis for determining fair market value. “While a court in determining fair market value may consider evidence of loans advanced on property during or near a particular tax status date when reviewing an assessment proceeding…such evidence standing alone is not entitled to ‘greatest weight’ because the reasons behind the terms and amount of the loan may be uncertain and unrelated to market values.” The court noted that building loans reflect anticipated future expenses, and other factors, such as Farash’s reputation as a developer, likely influenced the partners’ contributions. Both parties’ appraisers relied on the capitalization of income approach, making the trial court’s valuation more consistent with the weight of the evidence. The court emphasized that the presumption of valid tax assessments was overcome by the appraisers’ evidence, which indicated values below the assessments. The court stated that it would “exercise our power to choose between the trial court’s findings and the findings of the Appellate Division” to reinstate the trial court’s order.