The residential real estate business is one brutal business.
This interesting First Circuit Court of Appeals decision involves a breach of implied covenant of good faith and fair dealing claim in connection with the sale of a Nantucket Island summer home.
The Zachars put up $205,000 in earnest money to purchase the home from the Lees for total consideration of $2,050,000. Prior to closing, the Zachars plans changed and they decided not to close on the home. In an effort not to lose all of their $205,000 in earnest money, the Zachars persuaded the Lees to enter into another agreement in which the Lees agreed to list the property for another six month period. If the Lees sold it during that period, then the Lees would pay the Zachars any excess that they received over the original $2,050,000 purchase price up to a total of $205,000.
Inasmuch as the Lees’ real estate company was the sole broker of the property, the Zachars were fortunate to have a contractual provision in their favor that the Lees would use reasonable and commercial means to sell the property. I say that was fortunate because the Lees proceeded to jack up the asking price for the property to $2,475,000 and then refused to reduce the asking price during the term of their agreement with the Zachars. Not surprisingly, the home did not sell and the Lees claimed entitlement to the entire $205,000.
Those were fightin’ words. The Zachars sued the Lees for the $205,000 under the theory that the Lees’ conduct in jacking up the asking price and refusing to lower it was a breach of their implied covenant of good faith and fair dealing. The jury agreed, and awarded the Zachars $205,000 in damages from the Lees.
Undaunted, the Lees appealed, a part of which contended that the District Court should have granted the Lees’ Daubert challenge to the Zachars’ real estate appraiser’s expert opinion on the reasonable length of time necessary to sell the property. The First Circuit upheld the District Court’s overruling of the Lees’ Daubert challenge, reasoning that the expert’s opinion on that particular issue was not important to the expert’s overall opinion or the trial issues, and that the District Court’s decision, even if wrong, amounted to harmless error.
Seems to me that everyone involved in this debacle could have saved a lot of time and effort by simply splitting the earnest money at the outset. But my experience is that parties to residential real estate transactions rarely act rationally. Hat tip to Blog 702 for the link to this interesting decision.