New York Law Review

Tag: real estate

  • 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.”

  • Jarecki v. Shung Moo Louie, 95 N.Y.2d 665 (2001): Effect of Merger Clause on Option Contract After Exercise

    Jarecki v. Shung Moo Louie, 95 N.Y.2d 665 (2001)

    When parties enter into a formal contract of sale containing a merger clause after an option to purchase real property has been exercised, the terms of the purchase agreement are merged into the written contract, and the bilateral contract to purchase is terminated if the sale is cancelled according to the contract terms.

    Summary

    Jarecki, a sublessee with an option to purchase, exercised his option with the Louies. They then executed a contract of sale, including an anti-assignment provision and a merger clause, subject to co-op board approval. The board rejected Jarecki, cancelling the contract per its terms. Jarecki claimed the option remained and he could assign it to another buyer. The Court of Appeals held that the subsequent contract of sale, with its merger clause, superseded the initial bilateral contract created by exercising the option. When the sale failed, the entire agreement, including the purchase option, was terminated, preventing Jarecki from assigning a non-existent right.

    Facts

    Henry Jarecki entered into a three-year sublease agreement with Shung Moo Louie and Shung Mon Louie for a cooperative apartment in Manhattan, which included an option to purchase the apartment for $600,000, subject to the cooperative board’s approval. In February 1998, Jarecki notified the Louies that he was exercising the option. Thereafter, the parties executed a contract of sale, which included an anti-assignment provision and a standard merger clause, and reiterated that Jarecki’s right to purchase was subject to approval by the co-op board. In May 1998, the board rejected Jarecki’s application. Jarecki then tried to assign his “option” to another buyer.

    Procedural History

    Jarecki sued for specific performance and related claims. The Supreme Court granted the Louies summary judgment, dismissing the complaint, holding Jarecki had no continuing right to purchase after the co-op’s rejection. The Appellate Division reversed, granting Jarecki specific performance, reasoning that the board’s rejection voided the non-assignable contract of sale, but not the original option. The Court of Appeals reversed the Appellate Division and reinstated the Supreme Court’s judgment.

    Issue(s)

    Whether, after an option to purchase is exercised and a subsequent contract of sale is executed containing a merger clause, the original bilateral contract created by the exercised option survives the cancellation of the contract of sale based on a contingency within that contract.

    Holding

    No, because the terms of the purchase agreement were merged into the written contract of sale; therefore, the bilateral contract to purchase the apartment was terminated when the contract of sale was cancelled based on the co-op board’s disapproval.

    Court’s Reasoning

    The Court of Appeals reasoned that while exercising an option creates a bilateral contract, the parties’ subsequent written contract of sale, including a merger clause, superseded the initial agreement. The court stated, ” ‘An option contract is an agreement to hold an offer open; it confers upon the optionee, for consideration paid, the right to purchase at a later date’ ” (Kaplan v Lippman, 75 NY2d 320, 324). Once exercised, it ripens into a bilateral contract. However, the merger clause in the contract of sale indicated the parties’ intent that the written agreement was a complete integration of their understanding. The purpose of a merger clause “is to require the full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to alter, vary or contradict the terms of the writing” (Matter of Primex Intl. Corp. v Wal-Mart Stores, 89 NY2d 594, 599). Since the board disapproved the sale, which terminated the contract per its terms, Jarecki could not rely on a separate agreement that no longer existed. The court emphasized that options in leases are generally not independent of the lease terms and should not create unreasonable results, such as indefinitely undermining the property’s alienability. The court further stated that “It is possible to draft the provision so as to give the lessee an option to purchase as an independent contractual right, separable from the lease, but such a provision would be an unusual one” (Gilbert v Van Kleeck, 284 App Div 611, 616).

  • Lucenti v. Cayuga Apartments, Inc., 48 N.Y.2d 530 (1979): Specific Performance with Abatement After Property Damage

    48 N.Y.2d 530 (1979)

    When a building is substantially damaged by fire prior to the closing of title, and the real estate contract contains no risk of loss provision, the purchaser may obtain specific performance with an abatement of the purchase price.

    Summary

    This case concerns the right of a purchaser to seek specific performance with an abatement of the purchase price when a building on the property is substantially damaged by fire before the title closing. The New York Court of Appeals held that General Obligations Law § 5-1311, also known as the Uniform Vendor and Purchaser Risk Act, does not prevent a purchaser from seeking specific performance with an abatement, even when a material part of the property is destroyed. The statute provides the purchaser the *option* to rescind the contract. The court reasoned that the statute was intended to protect purchasers, not to limit their remedies beyond rescission.

    Facts

    Plaintiff entered into a contract to purchase two adjacent parcels of land, each with a building. One week after the contract was signed, one of the buildings was substantially damaged by fire. The defendant (seller) proposed modifying the contract to allow the plaintiff to collect insurance proceeds for reconstruction. Plaintiff did not formally accept this modification but waited for the insurance settlement. The seller later attempted to refund the plaintiff’s deposit, which the plaintiff refused, seeking to proceed with the purchase at an abated price.

    Procedural History

    The trial court dismissed the plaintiff’s complaint, holding that the statute required either rescission or specific performance without abatement. The Appellate Division reversed and remitted for a determination of the abatement amount. On remand, the trial court fixed an abatement, which the Appellate Division later modified, increasing the abatement amount. The Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether General Obligations Law § 5-1311 precludes a purchaser from seeking specific performance with an abatement of the purchase price when a material part of the property is destroyed by fire prior to the transfer of title or possession, and the contract contains no specific risk of loss provision.

    Holding

    No, because General Obligations Law § 5-1311 provides the vendee with a privilege to rescind, it does not eliminate the common-law option of specific performance with abatement.

    Court’s Reasoning

    The Court of Appeals examined the legislative history and purpose of General Obligations Law § 5-1311, noting its origins in the Uniform Vendor and Purchaser Risk Act. The court found that the statute was primarily intended to allocate the risk of loss between the vendor and purchaser, particularly in response to the common-law rule established in Paine v. Meller, which placed the risk on the purchaser. The court emphasized that the statute specifically allows the *purchaser* to rescind the contract if a material part of the property is destroyed, but it does not explicitly address or prohibit the remedy of specific performance with abatement. The Court noted that the Law Revision Commission’s report contained a gratuitous assessment that the deal should be called off upon destruction of a substantial part of the property, but this was incorrect. The court also relied on precedents such as World Exhibit Corp. v. City Bank Farmers Trust Co., which affirmed a purchaser’s right to seek specific performance with abatement under similar circumstances. The court reasoned that, because the legislature is presumed to know the existing judicial construction of a statute when reenacting it, the reenactment of § 5-1311 without changes impliedly adopted the interpretation that allowed for specific performance with abatement. The court quoted Matter of Scheftel, stating, “the Legislature is presumed to have had knowledge of the construction which had been placed on the provision * * * and in adopting in these re-enactments the language used in the earlier act, must be deemed to have adopted also the interpretation of the legislative intent decided by this court, and to have made that construction a part of the re-enactment”. Therefore, the Court concluded that the statute did not eliminate the purchaser’s common-law right to seek specific performance with a corresponding reduction in the purchase price to account for the damage. The seller argued that the purchaser abandoned the contract, but the Court found that the weight of the evidence supported the Appellate Division’s factual conclusions that the purchaser did not abandon the contract. The court noted the continuing negotiations between the parties and the seller’s agreement to await the insurance settlement before resolving the matter. Finally, the court approved of the Appellate Division’s revised abatement figure, which was based on the seller’s own valuation statements submitted in the insurance claim.

  • Graff v. Billet, 31 N.Y.2d 899 (1972): Broker Entitled to Commission When Seller Prevents Completion

    Graff v. Billet, 31 N.Y.2d 899 (1972)

    A seller may not avoid paying a broker’s commission if the transaction is terminated due to the seller’s failure to fulfill a condition, whether express or implied, necessary for the deal’s completion, even if the failure is not due to bad faith.

    Summary

    Graff, a broker, sued Billet, a lessor, to recover a commission. Billet signed a lease with a tenant procured by Graff, seemingly to support a variance application. Billet then withdrew the application, preventing the deal’s completion. The court held that the broker was entitled to the commission because the seller wrongfully prevented the completion of the transaction by withdrawing the variance application, which was necessary for the lease to proceed. The court clarified that the seller’s failure to perform a necessary condition did not have to be in bad faith for the broker to be entitled to the commission.

    Facts

    Billet, the lessor, engaged Graff, a broker, to find a commercial tenant.
    Graff procured a tenant, and Billet signed a lease with that tenant.
    One purpose of securing the lease was to support Billet’s variance application pending before the zoning board.
    Billet subsequently withdrew the variance application.
    Withdrawing the variance application rendered the completion of the lease deal impossible.

    Procedural History

    The broker, Graff, sued the lessor, Billet, to recover the broker’s commission.
    The lower court found in favor of Graff, the broker.
    Billet appealed, and the New York Court of Appeals affirmed the lower court’s decision.

    Issue(s)

    Whether a seller can avoid paying a broker’s commission when the transaction is terminated because of the seller’s failure to perform a condition necessary for completion, even if the failure is not due to bad faith.

    Holding

    Yes, because a seller may not avoid payment of the commission when the transaction is terminated by their failure to perform a condition, express or implied, necessary for completion, and this failure does not necessarily need to be born of bad faith.

    Court’s Reasoning

    The court reasoned that while the general rule is that a broker’s commission is earned only when the buyer and seller reach a meeting of the minds on the essential terms of the sale, there is an exception. This exception applies when the seller prevents the completion of the transaction by failing to perform a condition necessary for its completion.
    The court emphasized that the failure to perform such a condition does not have to stem from bad faith to trigger the exception. The key is whether the seller wrongfully or arbitrarily prevented completion.
    In this case, Billet’s withdrawal of the variance application, which was essential for the lease to proceed, constituted such wrongful prevention. By signing the lease and then withdrawing the application, Billet rendered the deal impossible, thereby entitling Graff to the commission.
    The court cited Lane-Real Estate Dept. Store v. Lawlet Corp., 28 N.Y.2d 36, 43 and Levy v. Lacey, 22 N.Y.2d 271, 276 to support the principle that a seller cannot avoid a commission when the transaction fails due to their non-performance of a necessary condition.
    The court stated, “Contrary to the intimation in the majority’s statement below, the failure to perform need not necessarily be born of bad faith.”
    The court found that there was a question of fact whether essential agreement had been reached and whether defendant wrongfully or arbitrarily prevented completion, and that the lower courts properly found against the defendant.

  • Barone v. Frie, 29 N.Y.2d 184 (1971): Purchase Money Mortgage Exception to Usury Laws

    Barone v. Frie, 29 N.Y.2d 184 (1971)

    A purchase-money mortgage is not considered a loan subject to usury laws, allowing sellers to charge interest rates exceeding the statutory maximum.

    Summary

    Plaintiff sought to invalidate a purchase-money mortgage, arguing it was usurious because it charged 7% interest, exceeding the legal rate of 6% at the time. The defendant seller argued that purchase-money mortgages are exempt from usury laws. The trial court dismissed the complaint, but the Appellate Division reversed. The New York Court of Appeals reversed the Appellate Division, holding that a purchase-money mortgage is not a loan within the meaning of the usury statute and therefore not subject to the statutory interest rate limitations. The court reaffirmed the long-standing exception to usury laws for purchase-money mortgages, emphasizing the freedom of contract between buyer and seller in setting the price of property.

    Facts

    Plaintiff, a real estate broker, bought property from the defendants for $15,500, paying $1,000 in cash and executing a purchase-money mortgage for $14,500. The mortgage stipulated a 7% interest rate. At the time, New York’s usury statute limited interest rates to 6%. Plaintiff then sued to declare the mortgage usurious and void.

    Procedural History

    The Special Term (trial court) dismissed the complaint, finding the purchase-money mortgage was not a loan subject to usury laws. The Appellate Division reversed, holding that while sellers could increase the mortgage obligation, they could not charge interest exceeding the statutory rate. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a purchase-money mortgage, explicitly stating an interest rate exceeding the statutory maximum, constitutes a “loan” subject to the state’s usury laws.

    Holding

    No, because a purchase-money mortgage represents the terms of a sale, not a loan or forbearance of money. Therefore, the usury statute does not apply.

    Court’s Reasoning

    The Court of Appeals relied on a long line of New York cases establishing an exception to usury laws for purchase-money mortgages. The court reasoned that the interest rate in a purchase-money mortgage is part of the agreed-upon price of the property. Citing Weaver Hardware Co. v. Solomovitz, 235 N.Y. 321, the court stated that “the laws against usury pertain to the loan and forbearance of money and not to the purchase price of building materials.” The court also noted Williston’s view that parties may agree to a higher price if paid later, even if stated as interest exceeding the legal rate. The court emphasized the principle of stare decisis and the need for stability in commercial transactions. It acknowledged that while a purchase-money mortgage could be a disguised loan, there was no evidence of subterfuge in this case. The court directly quoted McAnsh v. Blauner, 222 App. Div. 381, 382, affd. 248 N. Y. 537: “A contract which provides for a rate of interest greater than the legal rate upon a deferred payment, which constitutes the consideration for a sale, is not usurious.” The Court concluded that, based on settled authority, the purchase-money mortgage was not void for usury.