The California Court of Appeal held last week that a seller who breaches a commercial real estate purchase contract by refusing to sell may be liable for the buyer’s lost future profits.  Although the court held that lost profit damages were not recoverable under the particular facts of this case, the decision is important in that it is the first published California case indicating that such damages may be recoverable under the right facts.  Greenwich S.F., LLC v. Donna Wong, California Court of Appeal Case No.A123670 & A234882 (Dec. 2, 2010).
In 2003, the Seller entered into a real property purchase contract with the Buyer to sell a dilapidated residence on Greenwich Street in San Francisco for $760,000.  The Buyer intended to redevelop and resell the property at a profit.  The Buyer deposited funds into escrow, applied for various approvals and permits, and paid an architect to develop plans.  In 2005, the Seller refused to honor the purchase contract, demanding an increased purchase price of $1.1 million.
The jury found that the Seller breached the contract, and it awarded the Buyer three types of damages: (1) $60,000 for its escrow deposit; (2) $90,000 in sums the Buyer had expended toward renovation, such as architect fees and permit application costs; and (3) $600,000 in lost profits, namely the profits the Buyer expected to make had it purchased, redeveloped, and resold the property.
On appeal, it was not disputed that the Seller had breached the contract, and the court found that the $150,000 award for escrow deposit and renovation costs was proper.  But the court reversed the $600,000 award of lost profit damages, finding that although lost profits might be recoverable in a proper case, they were not recoverable under the circumstances presented here.  Specifically, the court held that lost profits can only be recovered:  (1) if both the Buyer and Seller understood that the Buyer expected to reap those profits as a result of the sale; and (2) if the Buyer can prove with reasonable certainty that it would have in fact earned those profits.
The court held that lost profit damages were not warranted here because the Buyer could not prove with reasonable reliability that it would have earned profits from redeveloping and reselling the property.  The Buyer had no established track record of successfully redeveloping properties; its principal had worked on only three prior redevelopment projects, and only one of those made a profit.  Similarly, although plans had been developed, their existence was not sufficient to show that the project was reasonably certain to be built, much less that it was reasonably certain to produce profits.  In addition, even if the Buyer would have earned profits, there was no reliable evidence of the amount of those anticipated profits.  For these reasons, the court reversed the jury’s award of $600,000 in lost profits.
The case is instructive for those in the commercial real estate business in that it held, for the first time in California, that lost profits may be awarded in some cases where a Seller has breached a commercial real estate purchase contract.  However, neither this case nor any other published California decision has actually upheld such damages to a Buyer.  The California courts seem to recognize that it will be the rare case where a Buyer is permitted to recover such lost profits damages.  Any such recovery is more likely to arise when the Buyer has an established track record of developing properties in a particular manner for a particular level of profit, such that both the likelihood and the amount of anticipated profits are reasonably certain.
For further information, please contact Jill B. Rowe of Cooper, White & Cooper’s Real Estate Solutions Group.