Jones v. Lee
1999 NMCA 008, 126 N.M. 467, 971 P.2d 858 (1998)
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Rule of Law:
The measure of general damages for a buyer's breach of a real estate contract is the difference between the contract price and the fair market value of the property at the time of the breach, not the difference between the contract price and a subsequent resale price. A non-breaching seller may also recover special damages that were a foreseeable consequence of the breach at the time the contract was formed.
Facts:
- On June 25, 1994, Ihn P. Lee and Philomena Lee (Buyers) entered into a written contract to purchase a residence from Sam P. Jones and Sharon A. Jones (Sellers) for $610,000, tendering $6,000 in earnest money.
- Several weeks later, the Lees informed the Joneses they could not complete the purchase due to financial reasons.
- On August 23, 1994, the Lees submitted a proposed termination agreement to the Joneses, offering to forfeit their earnest money to void the contract.
- The Joneses rejected the proposed termination and relisted the property for sale.
- In November 1994, the Joneses sold the property to a different purchaser for $540,000.
- During their attempt to terminate the contract, the Lees misrepresented their financial situation, as they had sufficient funds to complete the purchase.
- The Lees also attempted to contact the Joneses directly, and on one occasion frightened Mrs. Jones by pounding forcibly on her front door.
- Prior to the contract, the Joneses had purchased a separate lot and incurred $11,000 in architect and contractor fees for a new home they planned to build after selling their current residence.
Procedural Posture:
- On April 12, 1995, Sellers (Jones) filed a lawsuit against Buyers (Lee) in a New Mexico trial court for breach of contract.
- Buyers filed counterclaims against Sellers and a third-party claim against the Broker-Agents, alleging misrepresentation, fraud, and negligence.
- The Broker-Agents filed a counterclaim against Buyers to recover their real estate commission.
- After a bench trial, the trial court dismissed the Buyers' counterclaims and third-party claims.
- The trial court entered a judgment in favor of Sellers, awarding them $112,748.94 in compensatory and special damages and $33,000 in punitive damages.
- The trial court also entered a separate judgment in favor of the Broker-Agents for their commission and attorney fees.
- Buyers (Lee), as appellants, appealed both judgments to the New Mexico Court of Appeals.
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Issue:
For a buyer's breach of a real estate contract, does the proper measure of general damages equal the difference between the contract price and a subsequent resale price, or must damages be calculated as the difference between the contract price and the fair market value of the property at the time of the breach?
Opinions:
Majority - Donnelly, J.
No. The proper measure of general damages for a buyer's breach of a real estate contract is the difference between the contract price and the property's fair market value at the time of the breach. The trial court erred by calculating damages as the difference between the contract price and the subsequent, lower resale price. New Mexico follows the 'loss of the bargain' rule, which requires a specific finding of the market value on the date of the breach. While a resale price is evidence of market value, it is not conclusive. Because the trial court failed to make this finding, the award of general damages is remanded for proper calculation. The court affirmed awards for foreseeable special damages, such as mortgage interest payments and inspection fees required for resale, but reversed the award for architect's fees for a new home because these costs were not foreseeable to the Buyers at the time of contracting. The court also remanded the punitive damages award, reasoning that while there was evidence of wanton conduct, the amount was improperly tied to the erroneously calculated compensatory damages.
Analysis:
This decision solidifies New Mexico's strict adherence to the 'loss of the bargain' rule for calculating general damages in real estate contract breaches. It serves as a crucial precedent distinguishing between general damages, which are fixed to the market value at the time of breach, and a subsequent resale price, which is merely evidentiary. The ruling also clarifies the application of the foreseeability test for special damages, limiting recovery to costs that the breaching party could have reasonably anticipated. This case provides a clear framework for future litigation, requiring trial courts to make specific factual findings on market value and separating the analyses for general, special, and punitive damages.
