The Law of Purchase Agreements, Part Three: Minnesota Home Talk Legal Minute, May 31, 2014

During the month of May, my Legal Minutes on Minnesota Home Talk have focused on the basics of Purchase Agreements.  Part One covered the basics of contract formation.  Part Two covered the difference between legal and equitable title, and last week I jumped off to cover option agreements.  This week, in Part Three, I cover one of the more complicated equitable remedies which may be available upon one party’s breach of a real estate purchase agreement; namely, the equitable remedy of specific performance.

Specific performance is an equitable remedy which is available only in limited circumstances. In order to specifically enforce a contract, the following must be shown:

• If oral, the contract must be established by clear, positive and convincing evidence;

• The contract must have been made for adequate consideration and upon terms which are otherwise fair and reasonable;

• The contract must have been induced without sharp practice, misrepresentation, or mistake;

• Enforcement of the contract must not cause unreasonable or disproportionate hardship or loss to the defendants or to third persons; and

• The beneficiary of the specific performance must not have access to proper compensation in damages. i.e. no adequate remedy at law.

Johnson v. Johnson, 272 Minn. 284, 137 N.W.2d 840,847 (1965).

The absence of an adequate remedy at law is usually satisfied automatically when the subject matter is real estate. Land is not a commodity and, therefore, not easily replaced in the open marketplace. See, Shaughnessy v. Eidsmo, 222 Minn. 141, 23 N.W.2d 362 (1946). Cf. McClane v. White, 5 Minn. 178 (Gil. 139) (1860); Townsend v. Fenton, 30 Minn. 528, 16 N.W. 421 (1883) (value of services rendered as consideration for conveyance could be easily measured in damages).  The parties may, however, mutually agree to deprive one or both of themselves of the specific performance remedy. Raymond v.  McKenzie, 220 Minn. 234, 19 N.W.2d 423 (1945).

Since the seller is seeking money rather than real estate, however, courts generally are more reluctant to grant specific performance to seller than to buyer. A seller’s damages are usually measured by the difference between the contract price and the market value of the property at the time of the breach, plus expenses necessarily incurred by the seller in carrying out the contract, less any sums paid by the buyer on the contract price. Costello v. Johnson, 265 Minn. 204, 121 N.W.2d 70 (1963); Home Counsellors, Inc. v. Folta, 246 Minn. 481, 75 N.W.2d 417 (1956).  Nonetheless, Minnesota courts have made specific performance available to seller in limited circumstances. e.g. O.W. Kerr Co. v. Nygren, 114 Minn. 268,130 N.W. 1112 (1911); Kirk v. Welch, 212 Minn. 300, 3 N.W.2d 426 (1942). The Minnesota Court of Appeals has upheld an award of specific performance for a seller, reasoning the seller’s damages would be difficult to measure because “the estimated market value of [the] depreciating townhouse [is] difficult to ascertain … factors of fluctuating mortgage rates, costs, points, etc.” Simon Homes  Builders, Inc. v. Pailoor, 357 N.W.2d 383, 386 (Minn. Ct. App. 1984).

Seller is also denied specific performance if they are unable to deliver title in the condition required under the purchase agreement. The question of whether a title defect is of sufficient significance to preclude specific performance is determined by the rule of substantial performance. Friede v. Pool, 217 Minn. 332, 14 N.W.2d 454 (1944).  If the title defect is in a matter which is essential or material to the possession and enjoyment of the land, the seller is not able to substantially perform and is not entitled to specific performance. Friede v. Pool, supra (adverse possession of strip of 1.8 acres along boundary line of property in contract to convey 160 acres of farm land prevented purchaser from acquiring new and convenient outlet from the farm to public highway); Ortendahl v. Bergmann, 343 N.W.2d 309 (Minn. Ct. App. 1944) (specific performance for the seller was not granted where seller had agreed to provide marketable title and property was encumbered by a lease and common stairway which were not listed as permitted encumbrances in the purchase agreement).  However, if there is only a slight and insubstantial title defect or if the land is subject to a trivial encroachment that does not materially affect the value or enjoyment of the land which can be conveyed, specific performance will be granted to the seller with abatement in the purchase price or other adequate compensation to the purchaser. Id.

Whether or not the remedy of specific performance is available upon a breach by buyer or seller depends, in part, on the language of the purchase agreement itself; hence it is always a good idea to have an attorney assist in the drafting of the purchase agreement.

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NOTE:  this post contains excerpts from “Purchasing and Selling Real Property,” Real Property Law in Minnesota, Minnesota CLE (2008).