Daily Development for Monday, May 17, 1999

 

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

 

VENDOR/PURCHASER; BUYER'S REMEDIES;  DAMAGES:

The measure of damages for the breach of an express warranty in the sale of property is the same as the measure of damages for the breach of contract and must be proved with reasonable certainty. 

 

Hall v. Lovell Regency Homes Limited Partnership, 121 Md.App. 1, 708 A.2d 344 (Md.App. 1998).

 

Four couples purchased newly constructed homes in a development. After experiencing water and drainage problems with their properties, they brought suit against the builder of their houses and its general partners, alleging violations of the state's Consumer Protection Act and asserting claims in contract, warranty, and tort.  The trial court dismissed the Consumer Protection Act claims as a matter of law, and the jury returned a verdict granting each homeowner only nominal damages on the other causes of action. 

 

At trial, the homeowners presented evidence demonstrating that the developer misrepresented and warranted that their houses had been waterproofed; that the developer had shown them and other prospective buyers a model home with a finished basement, thereby misrepresenting that the houses they were purchasing would be suitable for use in a fully finished condition; that the developer's sales brochures misleadingly touted the attributes of the community; that the developer expressly warranted that there were no water problems in the neighborhood; that the houses would contain dry, usable basements; and, that the developer breached its construction contracts by failing to waterproof the houses as promised, by building the houses near or in a flood plain, and by not building the houses in conformity with sound engineering standards. 

 

According to the homeowners' expert witness, the defects in the property were irreparable and the properties were uninhabitable.  A real estate appraiser also testified that the properties were not marketable to someone who understood the degree of risk that was involved in purchasing the properties.  He opined that when property has a "zero" fair market value, the value is not measurable: "it has no quantification." 

 

After the taking of testimony, the trial court concluded that the homeowners had not presented cost of repair evidence and that they did not submit evidence competent to show the difference between the fair market values of their properties with and without defects at a given point of time.  On that basis, the trial court ruled that the homeowners' evidence was not legally sufficient to permit the jury to award contract, warranty, or tort damages for loss of fair market value measured under the "out-of-pocket" or "benefit of the bargain" test.  This was despite the fact that the developer had testified that to the extent that the water problems existed, they could be repaired for a total sum of $10,000 to $12,000.  The Court further denied a request from the homeowners that the jury be instructed on damages for "loss of use and enjoyment," because the evidence presented by the homeowners on that issue was speculative. 

 

The Appellate Court recited the common law that in tort actions founded on misrepresentation, "the aim of compensation ... is to put the buyer, as nearly as practicable, in the position he would have been had be not been defrauded."  In such cases, where someone has purchased real property that was not as it was represented to be, state law applies a "flexible" measure of damage that allows the buyer to choose between two sets of damages.  The first set is the "out-of-pocket rule," which is "the difference between the amount of the purchase price the buyer has paid and the actual value of the property on the date it was sold."  The other acceptable measure of damages for misrepresentation is the "benefit of the bargain" test, in which damages are "the difference between the actual value of the property at the time of the making of the contract and the value it would have possessed if the representations had been true."

 

The amount of damages recoverable for breach of contract is that which would place the interested party in the monetary position he would have occupied if the contract had been properly performed.  In a breach of contract action for defective performance of a real estate construction contract, the primary measure of damages is the cost of repairing or remedying the defect, but if the complainant presents proof that repairing the defect in the property would be infeasible or impractical, an acceptable secondary measure of damages is the loss in value of the property caused by the breach, i.e., the difference between the fair market value of the property without the defect  and the fair market value of the property with the defect.  Compensatory damages for breach of contract may be recovered subject to "limitations of remoteness and speculativeness."  Such damages "must be proved with reasonable certainty, and may not be based on speculation or conjecture... ."  Finally, the measure of damages for the breach of an express warranty in the sale of real property is the same as the measure of damages for breach of contract. 

 

In the Appellate Court's view, the contract, tort and warranty damages sought by the homeowners and potentially recoverable by them were essentially identical.  Because the homeowners maintained that the defects in their properties could not be cured, they did not introduce cost of repair evidence and instead sought to recover contract and warranty damages for the diminution in the fair market value of their properties caused by the developer's breach, under the "out-of-pocket" or "benefit of the bargain" tests.  It held that the trial court could have properly concluded that the homeowner's evidence was legally insufficient to prove loss in fair market value or loss of "use and enjoyment."  Therefore, having also failed to present "cost of repairs" evidence, the homeowners were not entitled to an award for damages.

 

Comment:

The plaintiffs' lawyers played a dangerous game here. Apparently they didn't want their clients to be stuck with only the cost of repairs, when in fact their clients viewed the property as valueless and clearly didn't want to repair. 

 

Plaintiffs could have, and, in retrospect, should have, sought rescission as a remedy, which would have restored the purchase price to the buyers.   Instead, they sought a measure of damages that went beyond that, seeking the difference between the value "as warranted" and the present value.  They then proceeded to argue that the present value was zero.  It seems apparent that the court was skeptical of that position. All land has some value for something.  Further, the court noted the evidence that the cost of repairs was not so great as to reduce the value to zero, but did not take that into account in favor of plaintiffs because it came from the developer and was not part of their case.

 

Plaintiffs allegations, detailed here, suggested that they had a strong case.  But the "pig" rule can getcha in the end.

 

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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