Real Estate Analytics, LLC v. Vallas

Opinion

The court, sitting without a jury, found a property owner breached his contract to sell a large parcel of coastal property to an investment company. The court, however, refused to grant the buyer’s request for specific performance based on the court’s conclusion that monetary damages were adequate because the buyer’s primary motivation was to quickly turn the property for a profit. We hold the court erred in refusing to grant specific performance on this basis. The law generally presumes real property is unique and that the breach of an agreement to transfer property cannot be adequately relieved by pecuniary compensation. The seller here did not overcome this presumption merely because the buyer’s purpose in purchasing the property was to earn profits from developing and/or reselling the property.

INTRODUCTION

Real Estate Analytics, LLC (REA), contracted with Theodore Tee Valias (Valias) to purchase 14.13 acres of land in northern San Diego County. After Valias cancelled the contract, REA brought a breach of contract action seeking specific performance. Valias cross-complained against REA and two individuals involved in the attempted purchase. After a court trial, the court found Valias breached the contract, but refused to grant specific performance and instead awarded REA damages of $500,000, reflecting the difference between the contract price and the fair market value at the time of the breach. The court found Valias did not prove his claims on the cross-complaint. The court awarded REA attorney fees of $272,918.

In the unpublished portion of the opinion, we reject Vallas’s challenge to the sufficiency of the evidence supporting the court’s finding that Vallas’s father acted as Vallas’s agent in his dealings with REA principals. We also reject Vallas’s arguments in a separate appeal consolidated with this appeal that the court erred in finding REA was the prevailing party for purposes of attorney fees.

FACTUAL AND PROCEDURAL SUMMARY

In summarizing the factual record, we state the facts in the light most favorable to the court’s rulings. (See Weeks v. Baker & McKenzie (1998) 63 Cal.App.4th 1128 , 1137-1138 [ 74 Cal.Rptr.2d 510 ].)

REA is a limited liability company formed by Troy Shadian. In January 2004, Shadian and his business partner, Roshan Bhakta, became interested in Vallas’s 14.13-acre property (the Lanikai Lane property) located in Carlsbad near the Pacific Coast Highway. The property contained a mobilehome park with 147 individual mobilehomes and numerous amenities, including a pool, playground, laundry facilities, and a long winding street. Valias leased the property to a mobilehome park operator, which managed the park and subleased the spaces to residents who owned their mobilehomes. The lease began in 1951 and terminates in 2013.

Valias, who was in his mid-40’s, owned the Lanikai Lane property, but had never been to the property because he considers the property to be his in name only. He inherited it from his maternal grandparents, and all income from the property is placed in a separate account which he does not use. His father, also named Theodore Valias (referred to in this opinion as Father), is an experienced businessman who manages all aspects of the Lanikai Lane property on Vallas’s behalf. The only authority that Valias did not delegate to Father was the responsibility for signing legal documents.

Beginning in January 2004, REA principals and Father engaged in negotiations regarding the purchase of Lanikai Lane. Once they reached a deal, in March 2004, REA and Valias entered into a written purchase and sale agreement. Under the agreement, the sales price was $8.5 million, with REA to pay an immediate $100,000 deposit, and then pay $2.9 million at closing. In return, Valias agreed to finance the remaining $5.5 million, with the unpaid

REA’s primary goal in purchasing the property was to make a profit for its investors. One proposed business model was to subdivide the property and sell the subdivided lots to the property’s mobilehome park residents. Shadian and Bhakta intended to make a substantial monetary profit through this investment.

In late March 2004, the parties opened escrow, and REA placed $100,000 in cash as a deposit. Escrow was scheduled to close on May 10, 2004. However, in a written modification, the parties agreed to extend this date to May 31, 2004.

In mid-May, REA sought a further extension to June 30, 2004, because of various remaining due diligence issues on both sides. On May 13, Father, who had represented Valias in all previous negotiations, orally agreed to the extension. Father thereafter engaged in conduct consistent with a conclusion that he and Valias had approved the extension. The parties continued with their due diligence during this period and met several times. However, Father (on Vallas’s behalf) also accepted a $13 million backup offer from the mobilehome park residents, who had formed an association for the purpose of purchasing the property.

Two weeks before the escrow was to close, on June 13, Father called REA’s real estate agent and escrow agent and told them he was “cancelling the deal.” The next day, on June 14, Father sent a fax to Bhakta and Shadian stating that Valias was cancelling the contract. On that same date, Valias sent a fax to REA stating he was cancelling the escrow.

The next day, on June 15, REA filed a superior court complaint against Valias, seeking specific performance of the real estate purchase contract. REA alleged Valias breached the agreement by anticipatory repudiation when he expressed his unequivocal intention not to sell the property to REA, and by failing to provide required due diligence documents. REA also alleged that Vallas’s breach of the agreement could not be adequately relieved by pecuniary compensation and therefore REA had no adequate remedy at law and was entitled to specific performance. REA claimed the sales price constituted adequate consideration and the agreement was just and reasonable in all respects. REA recorded a notice of pendency of action. Valias did not move to expunge the lis pendens.

Valias cross-complained against REA, Shadian, and Bhakta, alleging these parties failed to disclose that they had no financial ability to purchase the

At trial, REA’s primary legal theory was that Valias breached the contract by repudiating it on June 14 without providing REA the opportunity to perform its contractual obligations of depositing the $2.9 million into escrow. In defense, Valias argued that he was entitled to cancel the contract because REA breached the contract first by failing to make the $2.9 million deposit by May 31. Valias testified that he never agreed to extend the escrow date beyond May 31, and that to the extent that Father gave this extension, Father was not his agent and therefore he was not bound by Father’s acts.

In support of its request for specific performance, REA presented evidence of its ability to perform the contract at the time of the breach and at the time of trial. This evidence showed that Shadian and Bhakta were successful and experienced investors and had a large network of financially well-off supporters who were interested in this property and from whom they could immediately raise the additional $2.9 million needed to close the deal. REA also presented evidence that the contractual terms were fair and reasonable, and that the consideration was adequate. In this respect, REA called a real estate appraiser as an expert witness who testified that the fair market value of the property (encumbered by the long-term lease) was $9 million at the time of the contract formation and of the breach.

Valias countered that even if he breached the agreement, REA was not entitled to specific performance because REA was not ready, willing and able to deposit the $2.9 million into escrow. He also argued that REA’s legal remedy was adequate because the subject matter of the transaction was commercial property and the loss of the investment could be adequately offset by a pecuniary award.

At the conclusion of the trial, the court announced its mlings. With respect to the agency issue, the court stated that “substantial and credible evidence” showed Valias gave Father full authority to act on his behalf “in all matters related to the subject property.” The court further found that because Father continued to operate as if the contract was “in full force” after the May 31 closing, Valias waived his right to assert REA breached the contract by not placing the funds into escrow by that date. The court thus found that Vallas’s June 14 cancellation constituted a breach of the agreement.

But the court declined to award specific performance based on its finding that damages would provide REA adequate relief. As detailed in the Discussion below, the court found specific performance was not appropriate because REA purchased the property “solely as a commodity” to earn

After considering these arguments, the court ruled it would not grant specific performance because a damages remedy would provide REA adequate relief. The court explained its reasoning as follows: “A remedy at law is adequate for Plaintiff and therefore it would be improper to specifically enforce the subject contract. In quoting Reese v. Wong . . . (2001) 93 Cal.App.4th 51 [ 112 Cal.Rptr.2d 669 ], ‘a presumption of uniqueness is often inappropriate with respect to commercial real estate. The essence of commercial activity is the earning of money. Loss of a commercial investment can normally be offset by a pecuniary award.’ [REA], and specifically, Shadian and Bhakta purchased the subject property known as Lanikai Lane solely as a commodity. The evidence is overwhelming that their sole purpose in buying this property was to make money for their investors, as they have done on many, many occasions. The property’s uniqueness was not a concern. Their goal was to turn a profit from the property as quickly as possible by potentially buying out the leaseholder or reselling the property to someone else. The long history of dealing with the issue of whether or not the property is unique can be analogized to art. Courts oftentimes . . . specifically enforce the sale of residential and other properties because of the uniqueness of the property itself and the fact that just like art, it cannot be obtained by some other manner. In this particular case, [REA] was not concerned with the property. Bhakta and Shadian were not interested in going into the mobile home business or mobile home rental business. They were not interested in retaining the property for any length of time. They were simply interested, and the entire intent was to earn money for their investors and so therefore, this particular case is consistent with the thinking of Reese and as such specific performance under the circumstances of this case would not be appropriate.” (Underscoring omitted.)

After the court entered judgment, REA moved for a new judgment on the specific performance issue, asserting that its investment motivation did not, as a matter of law, support the court’s legal conclusion that damages were an adequate remedy. REA also argued that the difficulty in estimating lost profits—which REA argued could be as high as $11.3 million based on written projections provided to its investors—established the inadequacy of the damages remedy.

B. General Legal Principles

To obtain specific performance after a breach of contract, a plaintiff must generally show: “(1) the inadequacy of his legal remedy; (2) an underlying contract that is both reasonable and supported by adequate consideration; (3) the existence of a mutuality of remedies; (4) contractual terms which are sufficiently definite to enable the court to know what it is to enforce; and (5) a substantial similarity of the requested performance to that promised in the contract. [Citations.]” (Tamarind Lithography Workshop, Inc. v. Sanders (1983) 143 Cal.App.3d 571 , 575 [ 193 Cal.Rptr. 409 ]; see Henderson v. Fisher (1965) 236 Cal.App.2d 468 , 473 [ 46 Cal.Rptr. 173 ]; Civ. Code, §§ 3384, 3386, 3390, 3391.) A grant or denial of specific performance is reviewed under an abuse of discretion standard. (Petersen v. Hartell (1985) 40 Cal.3d 102 , 110 [ 219 Cal.Rptr. 170 , 707 P.2d 232 ].)

In this case, the court refused to specifically enforce the contract based on its finding that the first element (inadequacy of legal remedy) was not satisfied because REA sought to purchase the property as an investment, and not for some particular use of the land. REA contends this finding was incorrect as a matter of law and, alternatively, unsupported by the evidence.

It is a familiar legal principle that a damage award is generally an inadequate remedy for a breach of real estate contract, and therefore courts

As recognized by both parties and the trial court, there is a dearth of appellate court decisions in this state addressing the issue of the scope of the breaching party’s burden to rebut the presumption that the damages remedy is inadequate when the buyer sought to purchase the property for a commercial or investment purpose. Courts generally assume the uniqueness of land and grant specific performance after a breach of a land sale contract in both residential and commercial contexts, with little or no discussion of the adequacy of remedy issue.

Despite this lack of authority, we do not agree with REA’s argument that the presumption of the inadequacy of the remedy for commercial property is essentially conclusive, and can only be rebutted by a finding that specific performance is inappropriate for an independent equitable reason separate and apart from the inadequate remedy factor. A rule that the Civil Code section 3387 presumption can be rebutted only by an “independent” equitable reason is inconsistent with the statutory language that pertains to the adequacy of remedy element. By imposing a rebuttable presumption on the inadequacy of remedy element for certain types of purchases, the Legislature necessarily contemplated that there may be circumstances when the presumption that damages are inadequate can be overcome. Otherwise, the statutory distinction between a purchase of a single-family dwelling that the buyer intends to occupy and all other types of real property purchases would have no meaning.

D. Valias Did Not Meet Burden to Rebut Statutory Presumption in This Case

But the specific issue presented here is not whether a defendant can ever rebut the inadequacy of remedy presumption. The issue is whether Valias did so in this case. And on this issue, we agree with REA that Valias did not

Given the statutory presumption that damages were inadequate and the largely undisputed evidence strongly supporting this presumption, Valias had a high threshold to satisfy his burden to show damages would be an adequate remedy. In attempting to do so, Valias relied primarily on the appraisal of the Lanikai Lane property by REA’s expert who considered five recent mobile-home park sales. The sales prices for the comparable properties ranged from $5 million to $23 million. The parks were located in Los Angeles County, San Diego County and Ventura County. None of these sales was subject to a ground lease.

This evidence was insufficient to satisfy Vallas’s burden. The fact that other mobilehome parks had sold within a recent period does not mean that damages would be adequate to compensate REA for the loss of this property and accompanying investment opportunity. As one commentator has pointed out, to disprove the presumption, “a seller [must] show not only abstract replaceability but concrete availability of reasonably interchangeable property at terms within the buyer’s means.” (Bird, Toward Understanding California’s Rebuttable Presumption that Land is Unique, 1 Cal. Real Property J. No. 3 (Summer 1983).) There was no information in the appraiser’s testimony or his report showing that REA could purchase one of these identified mobile-home park properties on similar terms, or whether REA would be in a similarly situated investment position if it did complete a purchase. Because land is unique, different locations are not necessarily interchangeable, without evidence showing this to be the case.

Perhaps recognizing this gap in the evidence, the trial court did not base its conclusion on the appraisal report or the appraiser’s testimony, which it found

E. Reese v. Wong

In refusing to order specific performance, the court relied primarily on a footnote in a Court of Appeal decision, Reese v. Wong, supra, 93 Cal.App.4th 51 (Reese). This reliance was misplaced.

In Reese, the buyer sought damages, and not specific performance, after the seller breached an agreement to sell commercial real property. (Reese, supra, 93 Cal.App.4th at p. 54.) In determining the proper measure of damages, the reviewing court rejected a rule suggested in Stewart Development Co. v. Superior Court (1980) 108 Cal.App.3d 266 [ 166 Cal.Rptr. 450 ] that the damages measure should be different if the breaching seller had successfully expunged a lis pendens. (Reese, supra, at pp. 56-59.) In a footnote, the Reese court noted in dicta that the Legislature had disapproved another “aspect of the Stewart court’s decision” applicable to the standards for determining the adequacy of a legal remedy in lis pendens expungement proceedings. (Id. at p. 59, fn. 5.) The Reese court then quoted from the Real Property Law Section of the California State Bar’s comment to Code of Civil Procedure section 405.33, which states in part: “With respect to commercial real estate, a presumption of uniqueness is often inappropriate. The essence of commercial activity is the earning of money, loss of a commercial investment opportunity can normally be offset by a pecuniary award.” (Real Property Law Section, Cal. State Bar, com. on Assem. Bill No. 3620 (1991-1992 Reg. Sess.) 3 Assem. J. (1993-1994 Reg. Sess.) pp. 4284-4285, reprinted as Code Com., 14A West’s Ann. Code Civ. Proc. (2004 ed.) foil. § 405.33, p. 349.)

The trial court relied on this quotation as its sole legal authority to support its denial of specific performance in this case. To understand why this quotation is inapplicable here, we focus first on the code section to which the

The Real Property Law Section’s comment explaining this second paragraph of section 405.33 begins: “Civil Code [section] 3387 is based upon the historic common law proposition that all real property is unique, and creates a presumption that breach of an agreement to convey real property cannot be adequately relieved by pecuniary compensation. With respect to a single family dwelling which the claimant intends to occupy, the presumption is conclusive. ... [][].. . Case law regarding when real property other than a single family dwelling may be considered unique is not completely consistent.” (Real Property Law Section, Cal. State Bar, com. on Assem. Bill No. 3620 (1991-1992 Reg. Sess.) 3 Assem. J. (1993-1994 Reg. Sess.) pp. 4284-4285, reprinted as Code Com., 14A West’s Ann. Code Civ. Proc., supra, foll. § 405.33, pp. 348-349.)

To demonstrate this lack of consistency, the code comment cites to three Court of Appeal decisions: Sheets v. Superior Court (1978) 86 Cal.App.3d 68 [ 149 Cal.Rptr. 912 ]; Stewart Development Co. v. Superior Court, supra, 108 Cal.App.3d 266 ; and Jessen v. Keystone Savings & Loan Assn. (1983) 142 Cal.App.3d 454 [ 191 Cal.Rptr. 104 ]. (Code Com., 14A West’s Ann. Code Civ. Proc., supra, foll. § 405.33, p. 349.) None of these decisions directly addressed the availability of the specific performance remedy after a breach of contract. The decisions instead concerned standards applicable to lis pendens expungement proceedings (Sheets', Stewart Development), and the availability of injunctive relief (Jessen). The Stewart Development and Sheets reviewing courts each found that a monetary undertaking would not provide adequate protection in place of a lis pendens despite that the sale involved commercial property purchased for investment and/or development. (Stewart Development, supra, at pp. 272-273; Sheets, supra, at pp. 70-71.) Jessen held that where investment property is being marketed at an established price, monetary damages could provide an adequate remedy and thus a preliminary injunction was not available. (Jessen, supra, at pp. 457-458.)

The comment then continues: “With respect to commercial real estate, a presumption of uniqueness is often inappropriate. The essence of commercial activity is the earning of money; loss of a commercial investment

Code of Civil Procedure section 405.33 and its commentary plainly reflect the Legislature’s view that in certain cases a monetary undertaking will provide adequate protection in lieu of a lis pendens to a disappointed buyer of commercial and/or investment property. In disapproving Sheets and Stewart Development, the Legislature expressed its intent that trial courts have broad discretion to expunge a lis pendens in a case where the plaintiff/buyer was not intending to use the property for its own purposes and instead sought to purchase the property for commercial development and/or sale.

However, we disagree with the trial court that this intent extends to limit the availability of the specific performance remedy after a court has found a seller breached a commercial land sale contract. In the second paragraph of Code of Civil Procedure section 405.33, the Legislature made clear that Civil Code section 3387’s presumption shall not apply “[f]or purposes only of determining under this section whether ... an undertaking will secure adequate relief . . . .” (Code Civ. Proc., § 405.33, italics added.) In enacting this provision, the Legislature sought to make it easier to remove a lis pendens based on its concerns with the ease with which a lis pendens notice may be recorded and the burden placed on the seller by a lis pendens that can render a property unmarketable and unsuitable for a secured loan before there has been a trial on the merits. (See Campbell v. Superior Court (2005) 132 Cal.App.4th 904 , 915-916, 918 [ 34 Cal.Rptr.3d 68 ]; see also Kirkeby v. Superior Court (2004) 33 Cal.4th 642 , 651 [ 15 Cal.Rptr.3d 805 , 93 P.3d 395 ].)

These concerns are not applicable to a damages remedy after a trial on the merits. At that time, a trial court’s focus is on making the buyer whole, rather than on protecting the rights of a property owner who is only alleged

Judgment reversed. The court is ordered to enter a new judgment granting specific performance and to strike the alternate damages remedy. In all other respects, the judgment is affirmed. The attorney fees order is affirmed. Valias to bear REA’s costs on appeal.

Benke, Acting P. J., and McDonald, J., concurred.

The petition of appellant Theodore Tee Valias for review by the Supreme Court was denied May 21, 2008, SI62471.