Jones v. Lee
971 P.2d 858, 1999 NMCA 008, 126 N.M. 467 (1998)
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Rule of Law:
When a purchaser breaches a contract to buy real estate, the seller's general damages are calculated using the 'loss of the bargain' rule, which is the difference between the contract price and the property's fair market value at the time of the breach.
Facts:
- On June 25, 1994, Ihn P. Lee and Philomena Lee (Buyers) entered into a written contract to purchase the residence of Sam P. Jones and Sharon A. Jones (Sellers) for $610,000.
- Buyers tendered $6,000 in earnest money as part of the agreement.
- Several weeks after signing, Buyers informed Sellers that they were unable to consummate the agreement due to financial reasons.
- On August 23, 1994, Buyers submitted a proposed termination agreement, offering to forfeit their $6,000 earnest money to void the contract, which Sellers rejected.
- After it became clear Buyers would not honor the contract, Sellers relisted the property.
- In November 1994, Sellers sold the property to a different purchaser for $540,000.
- Prior to the contract with Buyers, Sellers had acquired a separate lot and incurred architect and contractor fees in preparation for building a new home.
Procedural Posture:
- Sam P. Jones and Sharon A. Jones (Sellers) filed a lawsuit against Ihn P. Lee and Philomena Lee (Buyers) in a New Mexico trial court for breach of a real estate purchase agreement.
- Buyers filed counterclaims against Sellers and a third-party claim against the Broker-Agents, Sonja Waldin and The Vaughn Company, Inc.
- Broker-Agents filed a counterclaim against Buyers to recover their real estate commission.
- Following 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, plus $33,000 in punitive damages.
- The trial court entered a separate judgment awarding Broker-Agents their commission and attorney's fees.
- Buyers (as appellants) appealed the judgments against them to the Court of Appeals of New Mexico.
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Issue:
In a breach of a real estate purchase contract, is the seller's general damage award properly calculated as the difference between the contract price and a subsequent resale price, rather than the difference between the contract price and the property's fair market value at the time of the breach?
Opinions:
Majority - Donnelly, J.
No. The proper measure of general damages for a seller in a breached real estate contract is the 'loss of the bargain' rule, which calculates damages as 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. The court reasoned that New Mexico law, established in cases like Aboud v. Adams, strictly adheres to this rule. While a subsequent resale price can be used as evidence of the market value, it is not conclusive. The trial court erred by simply subtracting the resale price from the original contract price without making a specific finding on the property's market value on the date the breach occurred. Therefore, the case must be remanded for a proper determination of damages. The court also held that special damages are recoverable if they were a foreseeable consequence of the breach at the time the contract was formed, upholding awards for inspection costs but reversing awards for unforeseeable architect fees related to a separate property. The punitive damages award was also remanded for reconsideration, as it was improperly tied to the erroneously calculated compensatory damages.
Analysis:
This case reinforces the mandatory application of the 'loss of the bargain' rule for calculating general damages in New Mexico real estate contract breaches. It clarifies that trial courts cannot use the simpler, but legally incorrect, method of subtracting a later sales price from the original contract price. The decision emphasizes the necessity for a specific factual finding of the property's fair market value at the precise time of the breach, making the subsequent sale price merely one piece of evidence among others. This holding provides a clear standard for future damage calculations and also solidifies the 'foreseeability' test for awarding special damages, distinguishing between costs directly related to resale and those too remote to have been contemplated by the breaching party.
