Under California law, “benefit of the bargain” damages for breach of a real estate contract is the difference between the actual value of what the plaintiff got and what he expected to receive. If Joe breaches his contract to buy a house from Sam for $100,000, and Sam later sells it for $80,000, Sam is entitled to damages of $20,000.
In a recent California decision parties contracted to buy & sell a commercial property, with environmental and financial contingencies in the contract. There was a problem with subsurface contamination, and it was unclear what the cleanup cost would be.
The buyer unexplainably released all financing contingencies, though they apparently did not have a firm commitment from the bank. The lender said they would not fund the loan due to the environmental contamination. The seller ended up selling to a third party for less, and in the process lost out on a 1031 exchange.
The buyer filed a lawsuit to get their deposit back, claiming fraud and mutual mistake. The trial judge found that there was no breach of the agreement, because neither party knew the full extent of the contamination- it was a mutual mistake of fact. The trial judge awarded the sellers the net difference in sales price.
The court of appeals said no- in the case of mutual mistake, the parties are restored as close as possible to their original position. Each side’s out of pocket expenses may be adjusted, but no one is put in a better position then when they started.
What is maddening about this case is how the buyer was “mutually” mistaken about the contamination, but the lender was not. The release of the financing contingency makes no sense in light of the lender’s position; it seems that the buyer then breached the contract by failing to perform because they did not have financing, not because the property was contaminated. Apparently the court did not see it that way.
Sharabianlou v. Karp (2010) 2010 WL 396319