In New Jersey, the remedies of a seller on a defaulted real estate contract are well settled. When a buyer defaults, the seller generally has three remedies it may exercise depending on the language of the contract. First, many contracts allow the earnest money deposit to be kept by the seller in the event that a buyer defaults, at which point the seller may put the property back on the market and resell it. Second, a seller may to sue for specific performance, requiring the buyer to close on the property. Finally, a seller may sue for breach of contract damages. Damages often claimed as a result of breach of real estate contracts include compensatory damages, consequential damages, incidental damages, punitive damages and liquidated damages.
The amount of permitted damages resulting from the breach of real estate contracts in New Jersey was outlined in the seminal case of Kuhn v. Spatial Design, Inc., 245 N.J. Super 378 (App. Div. 1991). There, the court found that where a real estate contract is breached by a purchaser, the seller may recover the difference between the contract price and the resale price, and any incidental and consequential damages less expenses avoided due to the breach. See Id. at 386. In Kuhn, the purchasers breached the contract for sale during a period when property values were declining, and the Appellate Division noted that where a seller does not put the property back on the market, “value at the time of breach is used, even in a declining market, because the choice of any other time would be so speculative.” Id. at 386-387.
In the unreported decision of Farnella v. Brana, A-1712-06T1, 2007 WL 2827554 (N.J. Super. Ct. App. Div. Oct. 2, 2007), the Appellate Division allowed a seller to recover a damage award consisting of mortgage payments, real estate taxes and insurance payments that a seller paid from the time of the breach until the house was resold. “Where the purchasers have breached a residential real estate contract, the sellers are entitled to retain from the deposit an amount representing the compensatory damage they sustained due to the breach.” Id. citing Kutzin v. Pirnie, 124 N.J. 500, 518 (1991).
In breach of contract matters, damages are permitted for “the natural and probable consequences of the breach.” Id. citing Pickett v. Lloyd’s, 131 N.J. 457, 474 (1993). It should be noted that the principles governing the award of compensatory damages are governed by the issue of foreseeability: The purpose of compensatory damages is “‘to put the injured party in as good a position as he would have had if performance had been rendered as promised.’ What that position is depends upon what the parties reasonably expected.” Donovan v. Bachstadt, 91 N.J. 434, 444 (1992) (citations omitted).
In Farnella, the court also found that the buyer did not sustain its burden to prove that the seller failed to mitigate its damages, noting that while a party who has been wronged by a breach is obligated to take reasonable actions to mitigate damages pursuant to McDonald v. Mianecki, 79 N.J. 275, 299 (1979), the burden of proving the failure to mitigate damages falls upon the breaching party.
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– Spencer J. Rothwell, Esq.