B. Recovery by the Seller

• Library: South Carolina Damages (SCBar) (2009 Ed.)

B. Recovery by the Seller

1. Breach of Contract

a. General Theory of Recovery

The contract and its contents are the most important aspects of a land sale transaction, and it is imperative that the drafter consider the myriad of challenges that could affect its validity. If a buyer is responsible for a breach of contract, damages should attempt to compensate the non-breaching seller for losses resulting from the breach. "In the case of a lost sale of a house, the proper measure of damages is the difference between the contract price and either (1) the fair market value of the house on the date of the breach or (2) the price at which the house is subsequently sold."² Furthermore, the damages must be the natural and probable result of the breach and reasonably within the contemplation of the parties at the time the contract was made.³ In other words, damages that were not foreseeable as a likely result of the breach of the contract at the time of its formation are not recoverable.

Whereas, some courts have held that the measure of damages can include other expenses incurred by the seller in his effort to carry out the contract, other courts have not allowed the recovery of such costs.⁴ Generally, where the seller is ready and willing to perform his obligations under the contract and the buyer refuses to do so, the seller has the right to terminate the contract and retain the earnest money regardless that the amount retained may be much larger than the damage suffered.⁵ The result is that the seller retains the property as well as the purchaser's payment, and "the earnest money becomes a fund out of which the damages may be partially paid if the proven damages exceed the amount of the earnest money."⁶

Although inconclusive, the price of the property at a subsequent sale, if done within a reasonable time after the breach of the contract, is "prima facie evidence" of the property's market value.⁷

Note that in certain jurisdictions, when both the buyer and the seller are in default of the contract provisions, the buyer is usually allowed to recover his deposit.⁸ Under certain circumstances, the seller may be able to retain the land and still collect damages from the buyer, although not the contract price. This might occur, for instance, when the buyer has contracted to pay more than the land is really worth. In such a case, the seller's loss equals the difference between the contract price and the fair market value of the land.⁹

(1) Gibbs v. G.K.H., Inc. ¹⁰

The buyer successfully bid on a piece of commercial property at a liquidation auction and tendered the earnest money towards its purchase.¹¹ He subsequently rescinded the sales contract after discovering defects in the title that would render it unmarketable.¹² Although the seller attempted to remedy the defects by removing underground storage tanks and obtaining a favorable title opinion letter, the buyer was not satisfied.¹³ The seller then sold the property to a third party for less than the original bid and retained the original buyer's earnest money pursuant to the liquidated damages clause.¹⁴ The trial court found that there was insufficient evidence to establish that the defects rendered the title unmarketable.¹⁵ It awarded damages to the seller in the amount of the deposit plus interest.¹⁶ The appellate court affirmed the award.¹⁷

(2) Benya v. Gamble ¹⁸

The parties allegedly entered into a contract for the sale of a lot on Hilton Head.¹⁹ The seller claimed that the earnest money was forfeited because the buyer refused to close.²⁰ The trial court granted a directed verdict for the buyer concluding that no enforceable contract existed.²¹ The court of appeals found that ample evidence would support a finding that a contract had been established and remanded the case to determine whether forfeiture of the earnest money constituted liquidated damages or a penalty.²²

(3) Morris Morgan Realty, Inc. v. Johnson ²³

The seller signed the offer and accepted the earnest money deposit from purchasers, thus creating an enforceable contract for the sale of real estate.²⁴ When the seller sued for breach of contract against the purchaser, the lower court sustained the purchasers' demurrer that argued that liquidated damages were the only remedy for breach by the purchaser.²⁵ The court of appeals reversed, saying that a contract had been established rather than an option and holding that "words in a contract to sell real estate providing that upon forfeiture the contract shall become null and void mean voidable at the seller's election."²⁶

(4) Bannon v. Knauss ²⁷

The sellers brought an action against the buyer for breach of contract for the sale of an ocean front lot in Hilton Head.²⁸ The buyer left a written offer and a check for the earnest money with the realtor.²⁹ The sellers accepted the offer.³⁰ Several months before the closing date, the buyer decided not to purchase the property and forfeited his earnest money according to the contract.³¹ The sellers were forced to resell the property at a lower price.³² On appeal, the buyer claimed that the only remedy for damages was the forfeited earnest money and that the sellers should have mitigated damages.³³ The court held that a clause for liquidated damages did not limit the remedies of the non-breaching parties unless the contract specified otherwise.³⁴ It also said that non-breaching parties were not required to mitigate, they were merely under a duty to take "reasonable steps to avoid those damages."³⁵ The court affirmed the jury award of damages representing the difference between the original price and subsequent sale price offset by the earnest money deposit and a less expensive real estate commission.³⁶

(5) Manning v. Columbia ³⁷

Although this case does not involve a dispute of a land sale contract, its discussion of damages is important. In 1967, the grantor conveyed land to the city to be used for a wastewater treatment plant.³⁸ The deed included a covenant that required the city to maintain a levee system.³⁹ In 1976, the levee broke in two locations causing the seller's adjacent 1,806 acres to flood with water and raw sewage.⁴⁰ The seller brought an action for breach of contract and damages. He suffered damages to his soy bean crop and presented evidence at trial that the value of the land had decreased by half because it now carried a "stigma as floodland," and therefore it could no longer be sold as commercial property.⁴¹ The supreme court affirmed the lower court's decision saying that commercial development was within contemplation of the parties at the time the contract was formed.⁴²

b. Loss Profits on Resale

If the seller did not own the property at the time the contract for the sale was formed but intended to acquire it a later date in order to make the conveyance to the purchaser and the purchaser was aware of the circumstances, a breach by the buyer could result in his liability for the seller's lost profits. Although no South Carolina case speaks directly to this issue, Sumner v. Bankhead⁴³ does involve similar circumstances. In Sumner, the buyer and seller entered into a contract to purchase a tract of land in Rock Hill that included four tenant houses and a barn. At the time the contract was made, the buyer was aware that the seller was not the owner of the property but was under contract to buy from the current owner. When the buyer failed to perform, the seller brought suit for specific performance and damages. The supreme court upheld the trial court's denial of specific performance. It also decreed that the liquidated damages provision of the contract was sufficient to cover any damages incurred by the non-breaching seller.

(1) Welling v. Crosland ⁴⁴

The sellers brought suit against the buyer real estate dealer for specific performance of a land sale contract where an unpaid balance of the purchase price was still outstanding.

Buyer argued that the purchase of the property was contingent on investor contributions and when a potential investor refused to take part in the transaction, the remaining investors were not liable for the contract. The court held that the sellers were entitled to specific performance of the contract because the trial court could style a judgment that could distribute the land purchased amongst the investors.

(2) Jackson v. Midlands Human Resources Center ⁴⁵

Although not a land sale contract case per se, this case involved an action for breach of contract and general and special damages against defendant educational organization.⁴⁶ The plaintiffs alleged that the defendant had agreed to cover the costs of a judgment entered against them regarding money owed on a school fundraiser gone awry. When the plaintiffs attempted to sell their home, they discovered that the title was unmarketable because the unpaid lien had not been cancelled. The defendant conceded the general damages but contested the special damages for the loss incurred by two failed house sales and a subsequent foreclosure sale. The circuit court entered judgment for damages in favor of the plaintiffs, awarding the full price of the second failed sales contract.⁴⁷ The supreme court reversed the award for special damages because the plaintiffs failed to present evidence on which to properly calculate the damages.⁴⁸ It further noted that "[at] best," the damages should have been no greater than the difference between the price of the second contract and the price obtained through foreclosure.⁴⁹ The court remanded the case to enter judgment only on general damages.⁵⁰

c. Special Damages from Buyer's Possession

Where the buyer is at fault for breaching the contract, the seller may bring an action for special damages in addition to "loss of bargain" or lost profit. "Special damages are those that may reasonably be supposed to have been in the contemplation of both parties, at the time of contracting, as the probable result of a breach."⁵¹ In most circumstances, special damages must be specifically alleged in the...