Appraising a presumption: a modern look at the doctrine of specific performance in real estate contracts.

• Author: Kirwan, Jason S.

INTRODUCTION

When two people agree to legally bind themselves to a contract, and one of these parties subsequently violates that agreement, the law has a difficult question to answer. It must determine whether the breaching party should be forced to go through with the deal as originally intended, or instead compensate the wronged party monetarily. The established common law of contract remedies in U.S. jurisdictions treats specific performance as discretionary. (1) Thus, courts may, in special circumstances, force the breaching party to go through with the bargain, but the default rule is cash payment to put the aggrieved party in as good a position as she would have been had the contract been completed. (2) This preference for cash payment, however, is reversed when the contract deals with a parcel of land. A land transaction triggers an almost automatic presumption that specific performance is appropriate. (3) This presumption, although longstanding and respected in the law, stands on some rather shaky logical grounds. (4)

First, in some areas of the specific performance doctrine, the application of the presumption is illogical and inconsistent. Based on the unique properties of the land in question, it makes some sense on historical and equitable principles that aggrieved buyers should be able to demand specific performance of a real estate contract. (5) In some jurisdictions, however, the law offers specific relief to sellers as well, forcing the buyer to take the property and give the seller a cash payment. (6) Cash, of course, is the most fungible property imaginable, and yet the magic of land's favored status allows specific performance to produce it.

Second, the automatic availability of specific performance tends to overcompensate parties harmed by the breach. (7) This occurs because once a breach materializes, the aggrieved party has an option either to force completion at the contract price via specific performance, or to seek compensation based on her expectations when the deal was made. (8) Real estate markets have been known to vary greatly over relatively short periods, and litigation over contract disputes often takes many months. Plaintiffs, then, have the luxury of observing the market for a period of time after the contract has been finalized to decide which remedy to pursue. This option confers upon a plaintiff a guarantee that she will be compensated at least in the full amount of her expectation, but it also creates a significant chance that she can improve her situation. (9) Overcompensation is a problem in contract law, which operates most efficiently when the damages awarded match the actual harm done. (10)

Last, specific performance provides compensation that necessarily includes a party's subjective valuations of property. (11) Apart from these transactions in land and a few other specialties such as heirlooms, contract law does not take these idiosyncratic viewpoints into account. (12) Wherever possible, valuations in contract law are based upon objective market-driven observations to preserve predictability and to allow for efficient breach. (13) A party seeking to breach efficiently could still use some of her breach savings as a payoff to prevent the other party from seeking specific enforcement, (14) but the increased transaction costs of this post-breach negotiation will tend to make contract formation more costly and inefficient.

The approach of general contract law, in which the party seeking specific performance must establish why it is logically justified, should be applied equally to contracts in land. Developments in the field of professional real estate appraisal have made it possible to ascertain accurately the market value of real property. For cases in which appraisers' methods fail, doctrines already in place to govern specific performance in general contract law can be utilized in favor of the aggrieved party. In a world in which land ownership is often seen as an investment in nearly fungible properties, in which real estate appraisers have increasingly scientific techniques, and in which judges have increased discretion in granting specific performance when the merits of the case actually require it, land's favored status is an increasingly undesirable relic of the Middle Ages.

Part I of this Note summarizes the existing state of the doctrine of specific performance, for nonland contracts and for real estate contracts. Part II addresses the historical and logical reasons that land is treated differently than other objects of contract actions, concluding that the only relevant justification for this disparate treatment that is consistent with the goals of modern contract law is the idea that land tends to be difficult to value and replace. Part III addresses this difficulty by surveying the predominant valuation methods in the field of real estate appraisal, and concludes that appraisal is sufficient for all cases that would not otherwise merit specific relief on equitable grounds. Part IV addresses the concern of increased judicial transaction costs.

1. CONTRACT LAW'S APPROACH TO SPECIFIC PERFORMANCE

   1. Nonland Contracts

      A party who, following a breach by the promisor, seeks specific performance of a nonland contract faces an uphill battle in American courts. In these situations, the presumption in favor of money damages can be overcome only if the court, in its equitable capacity, deems that monetary reimbursement is inadequate. (15) In making this decision, courts examine the difficulty in accurately calculating a party's expectation interest, (16) the problems, if any, that an aggrieved party may have in finding substitute performance, (17) and the likelihood that a cash award could not be collected. (18) Additionally, a court may choose to deny equitable relief if such relief would require excessive court supervision. (19) Other grounds of judicial efficiency are occasionally considered in this determination as well. (20) Of course, as with any decision a court makes in its equitable capacity, defenses addressing concerns of fairness and justice, such as inadequate consideration, lack of security for performance, and unilateral mistake, may be raised by the party seeking to prevent specific performance. (21)

      It is also important to note that the general trend in U.S. contract law favors increased latitude for trial courts to grant specific performance as a redress for breach. (22) The drafters of the Second Restatement of Contracts, drawing on the comments to the Uniform Commercial Code, incorporated this view in 1981 as an appropriate description of the direction of contract law. (23) Thus, even in nonland contracts, judges have been increasingly likely during the past several decades to grant specific relief in cases in which the circumstances meet the rational justifications of such relief, despite the fact that the presumption remains in favor of money damages.

   2. Land Contracts

      As mentioned above, plaintiffs suing for breach of a land contract are almost always given the option of receiving specific performance. In many jurisdictions, this is a flat rule. (24) Other jurisdictions phrase it as a presumption, but the result is usually the same. (25) On rare occasions, courts have given this presumption some teeth and denied specific performance when the underlying justifications for such enforcement were not present. (26) These insightful decisions denying specific performance have not, however, been widely followed or expanded. (27)

      There is also some dispute regarding who may take advantage of this presumption in favor of specific relief. It is fundamental that aggrieved buyers may demand specific performance of land contracts. (28) Some courts have also held that the principle of mutuality of remedies (29) requires that aggrieved sellers are afforded the same presumption. (30) Other courts, however, find this justification insufficient and will deny specific performance to sellers unless other factors compel such relief. (31) As previously mentioned, the idea that some special characteristic of land gives a person selling it the right to compel the buyer to take the land and pay the price is odd indeed.

2. REASONS FOR THE SPECIAL TREATMENT OF REAL ESTATE

   1. Historical Justifications

      The special treatment of real estate in contract law has its origins in the development of the English common law. In premodern England, land was both an economic asset and the primary indicator of a person's status. (32) During that period, "the contractual expectations of purchasers of real property consisted, in whole or in part, of political identity, political authority, a number of legal privileges, and social status, which may or may not have been transferred together with a valuable economic commodity." (33)

      Courts of law simply could not value expectations like "social status" or the right to vote for a representative in Parliament. (34) Even if they could do so, substitute performance would have been virtually impossible for an aggrieved buyer to find, as, at that time, land was rarely bought and sold. (35) It is thus eminently sensible that the law developing at the time would treat contracts dealing with transactions in land entirely differently than it would treat contracts for the sale or exchange of chattels or services. Because the courts of law were so ill-suited to consideration of issues pertaining to land, litigants took the other route offered to them: the courts of equity. (36) Equitable courts, of course, could address these problems through the use of their power to grant injunctions or performance when the plaintiff could get no satisfaction in the courts of law. (37)

   2. Modern Justifications

      Of course, the law/equity split in courts has been largely abolished in the United States. (38) Although some would argue that there remains a status element to land ownership, (39) it is clearly no longer a primary focus in the expectations of most...