Appraising a Presumption: A Modern Look at the Doctrine of Specific Performance in Real Estate Contracts

By Kirwan, Jason S. | William and Mary Law Review, November 2005 | Go to article overview

Appraising a Presumption: A Modern Look at the Doctrine of Specific Performance in Real Estate Contracts


Kirwan, Jason S., William and Mary Law Review


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. …

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