Business Law and the Regulation of Business 11th Edition by Richard Mann, Barry Roberts

Exercise 20

FACTS Real Estate Analytics, LLC (REA) is a limited liability company formed by Troy Shadian. In January 2004, Shadian and his business partner, Roshan Bhakta, became interested in Theodore Tee Vallas's 14.13-acre Lanikai Lane property located in Carlsbad, California, near the Pacific Coast Highway. The property contained a mobile home park with 147 individual mobile homes and numerous amenities, including a pool, playground, laundry facilities, and a long winding street. Vallas leased the property to a mobile home park operator, which managed the park and subleased the spaces to residents who owned their mobile homes. The lease began in 1951 and terminates in 2013.
REA's primary goal in purchasing the property was to make a profit for its investors and themselves. One proposed business model was to subdivide the property and sell the subdivided lots to the property's mobile home park residents. In March 2004, REA and Vallas entered into a written agreement for Vallas to sell the property to REA. Under the agreement, the sales price was $8.5 million, with REA to pay an immediate $100,000 deposit, and then pay $2.9 million at closing. In return, Vallas agreed to finance the remaining $5.5 million, with the unpaid balance to be paid over a five-year period, with the balance due on April 1, 2009. On June 14, Vallas cancelled the contract. The next day REA brought a breach of contract action seeking specific performance. The court, sitting without a jury, found Vallas breached the contract but refused to grant specific performance and instead awarded REA damages of $500,000, reflecting the difference between the contract price and the fair market value at the time of the breach. The court declined to award specific performance on the basis of its finding that damages would provide REA adequate relief.
DECISION Judgment is reversed, and the trial court is ordered to enter a new judgment granting specific performance.
OPINION Haller, J. To obtain specific performance after a breach of contract, a plaintiff must generally show: (1) the inadequacy of his legal remedy; (2) an underlying contract that is both reasonable and supported by adequate consideration; (3) the existence of a mutuality of remedies; (4) contractual terms which are sufficiently definite to enable the court to know what it is to enforce; and (5) a substantial similarity of the requested performance to that promised in the contract. [Citations.] ***
In this case, the court refused to specifically enforce the contract based on its finding that the first element (inadequacy of legal remedy) was not satisfied because REA sought to purchase the property as an investment, and not for some particular use of the land. REA contends this finding was incorrect as a matter of law and, alternatively, unsupported by the evidence.
It is a familiar legal principle that a damage award is generally an inadequate remedy for a breach of real estate contract, and therefore courts routinely grant a plaintiff's request for specific performance. [Citation.] This rule arose in medieval England where land ownership was a primary indicator of the owner's social status and voting rights. [Citations.] ***
Although these historical reasons no longer apply, most jurisdictions have continued the rules requiring special treatment of land sale contracts, reflecting the enduring view that: (1) each parcel of land is unique and therefore there can be no adequate replacement after a breach; and (2) monetary damages are difficult to calculate after a party refuses to complete a land sales contract, particularly expectation damages. (See Rest.2d Contracts, § 360.) *** [L]egislatures and the courts have largely adhered to the rule that specific performance is the appropriate remedy upon a breach of a real estate contract.
In California, these principles are embodied in section 3387. Section 3387 states:
It is to be presumed that the breach of an agreement to transfer real property cannot be adequately relieved by pecuniary compensation. In the case of a single-family dwelling which the party seeking performance intends to occupy, this presumption is conclusive. In all other cases, this presumption is a presumption affecting the burden of proof.
By imposing a conclusive presumption for certain residential transactions, the Legislature decided that monetary damages can never be satisfactory compensation for a buyer who intends to live at a single-family home, regardless of the circumstances. But by establishing a rebuttable presumption with respect to other property, the Legislature left open the possibility that damages can be an adequate remedy for a breach of a real estate contract. The rebuttable presumption shifts the burden of proof to the breaching party to prove the adequacy of the damages. By so doing, the Legislature intended that a damages remedy for a non-breaching party to a commercial real estate contract is the exception rather than the rule.
*** [California courts] generally assume the uniqueness of land and grant specific performance after a breach of a land sale contract in both residential and commercial contexts, with little or no discussion of the adequacy of remedy issue.
*** By imposing a rebuttable presumption on the inadequacy of remedy element for certain types of purchases, the Legislature necessarily contemplated that there may be circumstances when the presumption that damages are inadequate can be overcome. ***
But the specific issue presented here is not whether a defendant can ever rebut the inadequacy of remedy presumption. The issue is whether Vallas did so in this case. And on this issue, we agree with REA that Vallas did not make a sufficient evidentiary showing to establish damages were adequate to compensate REA for the breach. *** Although it did not need to do so, REA produced strong evidence to support the presumption. This evidence showed that the Lanikai Lane property is unique in terms of its size, location, and existing use-it consists of 14.13 acres near the Pacific Ocean and contains an established mobilehome community. The property has ocean views and is close to several desirable local beaches, two major vacation resorts, the Del Mar racetrack, expensive neighborhoods, and major transportation routes. REA's evidence also showed that Lanikai Lane is unique in terms of the potential profits resulting from ownership because of its existing use (mobilehome park) on a longterm lease that would terminate in 2013, and the fact that existing residents would like to obtain ownership interests in the property. REA purchased the property for investment purposes, and it intended to obtain the highest return on this investment by subdividing the property and selling it to the existing residents of the park, which could result in substantial profits.
Given the statutory presumption that damages were inadequate and the largely undisputed evidence strongly supporting this presumption, Vallas had a high threshold to satisfy his burden to show damages would be an adequate remedy. ***
***
*** Thus, although REA did not necessarily intend to benefit from its personal or commercial Use of the land, the land did have a particular unique value because of the manner in which it could be used to earn profits upon a resale. *** Missing from the court's analysis was the recognition that to rebut the presumption that damages are an inadequate remedy, the defendant must come forward with evidence showing that damages will fully compensate the plaintiff for the breach. The record in this case was bereft of any such evidence.
INTERPRETATION Specific performance is an appropriate remedy when there is no adequate remedy at law.
CRITICAL THINKING QUESTION Should specific performance be available for all breaches of contract? Explain.