Lost Profits May Be Awarded as Consequential Damages for Breach of Contract for the Sale of Real Property

In Greenwich S.F., LLC v. Wong, (— Cal.Rptr.3d —-, Cal.App. 1 Dist., December 2, 2010), a court of appeal considered whether lost profits may be awarded as consequential damages for breach of contract for the sale of real property. The court of appeal held that, although lost profits may be available in some circumstances for breach of contract for the sale of real property, the trial court erred in awarding lost profits in this case because “the evidence showed the prospect of profits was uncertain, hypothetical and entirely speculative.”

Facts

Yui Hei Chan (“Chan”) and Dennis Wong (“Dennis”) agreed that Dennis would buy a piece of real property on Greenwich Street in San Francisco and Chan would either remodel the structure located on the property or rebuild it. Dennis died three months after he purchased and took title to the property in joint tenancy with his wife, Donna Wong (“Donna”). Prior to Dennis’s death, Chan had begun to work with an architect. Donna claims that after Dennis’s death, Chan asked her to enter into an agreement pursuant to which he would fix the property for her and they would split the profits. Chan denied that he proposed such an agreement. Chan claims that his agreement with Dennis provided he would be paid for his work as a contractor plus 20 percent of the profit when the property was resold. Chan, however, could not approximate what profit he expected to make pursuant to his agreement with Dennis.

Chan approached John Lee (“Lee”) about purchasing the property and allowing Chan to renovate it. Lee and two other investors formed Greenwich S.F., LLC, for the purpose of buying, developing, and reselling the Greenwich Street property. After Chan told Donna he had a buyer for the property, a realtor prepared a purchase agreement. Chan, who was named as the buyer in the contract, signed the contract and agreed to purchase the property for $760,000. Chan later executed a complete assignment of his rights under the contract to Greenwich S.F. Donna signed and dated the contract on July 30, 2003. Lee wrote a check for a $60,000 deposit so that escrow could be opened. Chan worked on obtaining permits and approvals for the property. The plans for the property were revised several times before Greenwich SF settled on a plan to build an approximately 4,000 square-foot single family home.

In September 2003, Donna notified Chan that closing would be delayed because tax issues had arisen with Dennis’s estate. In March 2004, Chan received a letter from Donna’s attorney which had a heading that read “Notice of Rescission of Contract.” The letter stated that the property was in probate and the escrow had to be cancelled. The property, however, was held in joint tenancy so it should not have been included in the probate estate. After Donna agreed to open a new escrow after the probate issues were resolved, Chan signed cancellation instructions. Chan and Lee asserted they never agreed to rescind the purchase contract. A permit for development of the property was issued in 2005.

Donna later told Chan the purchase price for the property had gone up to $1.1 million. Greenwich S.F. filed a lawsuit against Donna for breach of contract. A jury found in favor of Greenwich S.F. on its breach of contract claim. The jury awarded Greenwich S.F. $600,000 for lost profits, $90,000 for costs incurred to develop the property, $60,000 for payment made toward the purchase price, and $391,000 for attorney fees.

Decision

The primary issue before the court of appeal was whether Greenwich S.F. could recover damages for lost profits. The court of appeal held that, although lost profits may be awarded for breach of contract for the sale of real property, the trial court erred in awarding such damages to Greenwich, S.F. because it failed to present sufficient evidence of its lost profits.

Civil Code section 3306 mandates that the proper measure of damages for the breach of a real estate contract must be measured as follows: “The detriment caused by the breach of an agreement to convey an estate in real property, is deemed to be the price paid, and the expenses properly incurred in examining the title and preparing the necessary papers, the difference between the price agreed to be paid and the value of the estate agreed to be conveyed at the time of breach, the expenses properly incurred in preparing to enter upon the land, consequential damages according to proof, and interest.” The issue before the court was whether consequential damages under section 3306 may include lost profits. After reviewing legislative history, California case law, and case law from other states, the court concluded that lost profits may be awarded as a component of consequential damages under section 3306 upon a proper showing.

The court, however, held that in this case “the occurrence and extent of the projected lost profits were not proven with the requisite reasonable certainty.” Lost profits must be shown to be “within the contemplation of the parties at the time the contract was made” and the lost profits “must be proven to be more than speculative, remote, or contingent.” The evidence presented here was not sufficient to show that Greenwich S.F. or Chan “were established businesses or had track records of successfully developing or redeveloping properties.” Chan could not provide an estimation of how much he expected to earn as a contractor on the project. The plans for the redevelopment of the property were changed several times after the contract was entered into by the parties. The evidence submitted to the jury regarding the cost to construct the single-family residence was sparse. The court concluded, “The proposed real estate development project here involved numerous variables that made any calculation of lost profits inherently uncertain.”

The trial court improperly awarded lost profits to Greenwich S.F. because the evidence regarding lost profits “was uncertain, hypothetical and entirely speculative.” The court of appeal reversed the judgment of the trial court in regard to the lost profit damages award to Greenwich S.F.

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