Wong was an investor in San Francisco real estate. He frequently worked with Chan, a contractor, who would repair & renovate properties for Wong, and they would share in the profit on resale. For this particular property, Chan was to get 20% of the profit. Wong died shortly after the purchase, and his widow wanted to sell the property. Chan created an LLC with other investors, and the LLC contracted with the widow to buy the property. The widow changed her mind, wanted more money, and refused to close escrow. The LLC sued. At trial, the LLC was awarded lost profits as an element of damages; the widow appealed.
Civil Code section 3306, regarding damages for breach of a real estate contract , provides that the measure of damages for plaintiff is the difference between the contract price and the fair market value of the property at the time of the breach plus consequential damages. The code was amended in 1983 to add “consequential damages,” in order to conform this provision to to the general contract measure of damages which is specified in Civil Code 3300.
Consequential damages are those which, in view of all facts known by the parties at the time of the making of the contract, may reasonably be supposed to have been considered as a likely consequence of a breach in the ordinary course of events. Before this decision no reported decision has held that ‘lost profits’ are available as consequential damages to a real estate buyer. Here, the court reasoned that the intent of the legislature was to make available consequential damages as they were available in any type of contract dispute. So, in certain circumstances, lost damages are available in real estate contract disputes.
However, the court of appeals found there was insufficient evidence of lost profits in this case, so overturned the award. What does it take to get lost profits? First, all the parties must be aware of the plan of the buyer to resell for profit. However, damages for prospective profits that might otherwise have been made from its operation are often not recoverable because their occurrence is uncertain, contingent and speculative. They are allowed where their nature and occurrence can be shown by evidence of reasonable reliability. Here, there was insufficient evidence that either Chan or the LLC had any history of developing properties for profitable resale. The LLC never obtained a construction loan nor was there evidence that it could obtain one. There was no testimony as to the cost of the renovation. This decision provides a roadmap for proving lost profits, or finding that there is insufficient evidence of them, in a real estate contract lawsuit.