Specific Performance in Real Estate Contracts


Specific Performance in Real Estate Contracts

When is specific performance available upon the breach of a sales contract involving real property? 

Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time. Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed.

What Is Specific Performance?

When one party to a sales agreement breaches the contract by not performing as required by the contract’s terms, the harmed party often does not want monetary damages but desires actual performance. Such a demand is called “specific performance.” Specific performance is an order by a court that a contract be fully performed according to its terms. See Restatement (Second) of Contracts § 357, cmt. a (1981) (“Specific performance is the fulfillment of the performance due in the contract as nearly as practicable, by the party in breach.”). 

The remedy of specific performance is equitable in nature and governed by equitable principles. Strahan v. Haynes, 33 Ariz. 128, 139, 262 P. 995, 999 (1928). Thus, it is not an appropriate remedy if there is evidence of unfairness, fraud, or overreaching on the part of the non-breaching party. Shreeve v. Greer, 65 Ariz. 35, 39, 173 P.2d 641, 644 (1946). Moreover, a non-breaching party does not have the right to specific performance, but must prove several elements and overcome various equitable defenses in order to succeed in such an action. Canton v. Monaco P’ship, 156 Ariz. 468, 470, 753 P.2d 158, 160 (Ct. App. 1987).

When Should a Court Enforce Specific Performance?

Succinctly, specific performance is available when there exists: 1) a valid and binding contract; 2) definite and certain terms; 3) mutuality of obligation and remedy; 4) freedom from fraud and overreaching; and 5) lack of remedy at law. Shreeve, 65 Ariz. at 39, 173 P.2d at 644 (citation omitted). Each of these elements will be discussed in turn. 

A Valid and Binding Contract

Under Arizona’s Statute of Frauds, an agreement for “the sale of real property or an interest therein” requires a writing, signed by the parties to be charged. Ariz. Rev. Stat. Ann. § 44-101(6) (West). The writing must contain the terms and conditions of all the promises constituting the contract and by whom and to whom the promises are made. Shreeve, 65 Ariz. at 39, 173 P.2d at 644.

 In general, an enforceable contract requires three basic elements: 1) an offer, 2) acceptance, and 3) consideration. Without detailing each component too much, the first two elements are often combined into one affair: mutual consent. “It is elementary that before there can be a binding contract there must be mutual consent of the parties to the terms thereof.” Heywood v. Ziol, 91 Ariz. 309, 372 P.2d 200 (1962); see Denbo v. Badger, 18 Ariz. App. 426, 427–28, 503 P.2d 384, 385–86 (Ct. App. 1972) (holding that specific performance was not available to a prospective buyer of real property because there was no mutual consent between the buyer and seller). 

Notably, Arizona law construes escrow instructions, supplemental escrow instructions, and even receipts as valid “writings” sufficient to show an agreement between the contracting parties. T. D. Dennis Builder, Inc. v. Goff, 101 Ariz. 211, 214, 418 P.2d 367, 370 (1966). Courts do not require a specific format for written agreements; rather, the key is that all of the necessary elements are present. The required elements, which must be shown by clear and convincing evidence, are: “the names of the parties, the description of the land, the purchase price, the time of payment, and the promise to execute and deliver instruments of conveyance.” Id. (quotation omitted). In short, if all the essential terms of a contract of sale are agreed upon by the parties when they signed the agreement, there will be a valid contract. Id.  

Furthermore, an “agreement to make an agreement” is not specifically enforceable when it does not set forth all of the essential elements of the future contract. Peer v. Hughes, 25 Ariz. 105, 213 P. 691 (1923); see Ripps v. Mueller, 21 Ariz. App. 159, 517 P.2d 512 (Ct. App. 1973) (holding that a commercial sales contract stating that the contract was subject to a final agreement was not specifically enforceable because it was an agreement to make an agreement). For example, suppose Sam and Adam agree to come to an agreement at a later date for the sale of one of many breweries that Sam owns but do not identify the price, the future date, or even the specific brewery, the agreement will not be specifically enforceable by either Sam or Adam. At bottom, unless the initial agreement specifically identifies all of the subsequent agreement’s details, it will not be specifically enforceable. 

Definite and Certain Terms

“In order to compel by specific performance the sale of certain land, the contract must be definite and certain.” Suttle v. Seely, 94 Ariz. 161, 164, 382 P.2d 570, 572 (1963) (citation omitted); see LeBaron v. Crismon, 100 Ariz. 206, 208, 412 P.2d 705, 706 (1966) (“A court should decree specific performance of an agreement for the sale of land if the agreement is in writing signed by the party to be charged and is definite in its terms.” (citations omitted)). 

Additionally, “[i]t is generally true that where time of performance of an agreement for the sale of realty is not made the essence of the contract, a failure to specify the time of performance will not necessarily defeat specific performance, since it will be implied that performance may be required within a reasonable time.” Suttle, 94 Ariz. at 164, 382 P.2d at 572; see Ceizyk v. Goar Serv. & Supply, Inc., 21 Ariz. App. 119, 516 P.2d 61 (Ct. App. 1973) (same). Consequently, if the terms regarding the time of performance are not definite or certain, a factual issue develops, generally precluding summary judgment. See Suttle, 94 Ariz. at 164–65, 382 P.2d at 572–73 (holding that summary judgment should not have been granted by trial court when the terms of a contract for the sale of land were not definite). But see Ceizyk, 21 Ariz. App. at 122, 516 P.2d at 64 (holding that performance after a one-year delay did not constitute performance within a reasonable time and granted judgment to the sellers of property). 

Mutuality of Remedy and Obligation 

As a general rule, specific performance will be granted only in cases where there is “mutuality of remedy,” requiring that a remedy must be available to both parties of a transaction in order for either to obtain it. The doctrine is based on the idea that one party should not be able to force specific performance through equity when the other party cannot do the same. Thus, equity will not compel one party to specifically perform where it cannot compel performance by the other.

To that end, while most cases involve the buyer of real property requesting specific performance from the seller, the law recognizes that the seller has a remedy in specific performance as well. 71 Am. Jur. 2d Specific Performance § 133 (2014) (hereinafter Specific Performance). In these cases, specific performance is warranted when the seller establishes that he or she is ready, willing, and able to convey good and marketable title, free and clear of encumbrances or material defects, and there is no indication that the contract was inequitable or that a change in the circumstances rendered specific enforcement of the contract unjust although the relief actually obtained by him or her is the recovery of money—the purchase price—for which he or she may also have a remedy by an action at law. Id.  

Additionally, to be enforceable, a contract must also have “mutuality of obligation.” This requirement “consists in the obligation on each party to do, or to permit something to be done, in consideration of the act or promise of the other.” Remele v. Hamilton, 78 Ariz. 45, 50, 275 P.2d 403, 407 (1954) (quoting Gates v. Ariz. Brewing Co., 54 Ariz. 266, 270, 95 P.2d 49, 51 (1939)). Mutuality of obligation is an essential element of every enforceable agreement. Id.  

Accordingly, “an agreement which permits one party to withdraw at his pleasure is void.” Horizon Corp. v. Westcor, Inc., 142 Ariz. 129, 133, 688 P.2d 1021, 1025 (Ct. App. 1984) (quotations omitted). In Horizon, the court addressed whether a “satisfaction clause” rendered a real property purchase agreement void for lack of mutual obligation. Id. at 130, 688 P.2d at 1022. The contract provided for certain conditions subsequent, and if any of the conditions were not fulfilled, the buyer had the option to rescind the contract and withdraw all of its earnest money or waive the condition and proceed with escrow. Id. The court applied a two-prong analysis for assessing the validity of a satisfaction clause: 1) where commercial value or quality is an issue, an objective standard of reasonableness is applied in determining whether satisfaction is received; and 2) if the question of whether satisfaction is received is based upon subjective factors, the party exercising that judgment is required to adhere to an implied duty of good faith. Id. at 134, 688 P.2d at 1026. The court held that the buyer was entitled to specific performance Id. The court reasoned “the promisor’s duty to exercise his judgment in good faith is an adequate consideration to support the contract.” Id. (quotations omitted). The court continued by noting “[c]ontracts making the duty of performance of one of the parties conditional upon his ‘satisfaction’ are upheld on the theory that the expression of dissatisfaction must be genuine and not arbitrary and that an objective criterion-good faith-controls the exercise of the right to determine satisfaction.” Id. (quotations omitted); see also Beninger v. Calvin, 2008 Ariz. App. LEXIS 224, 2008 WL 4368204 (Ariz. Ct. App. Sept. 23, 2008) (holding that a contract for the sale of land was not lacking mutual obligation even though one party could cancel the purchase agreement if he “reasonably disapproved” of title defects or physical inspection items because this option was a “subjective condition” that allowed the party to cancel the contract but only when acting reasonably and “in good faith,” thereby providing adequate consideration as the contract prevented the party from acting “arbitrarily”). 

Freedom from Fraud and Overreaching

In order to stifle fraud, Arizona requires a non-breaching party to prove he or she was “ready, willing, and able to perform” under the contract. See, e.g., Kammert Bros. Enters., Inc. v. Tanque Verde Plaza Co., 102 Ariz. 301, 306, 428 P.2d 678, 683 (1967); Nelson v. Cannon, 126 Ariz. 381, 385, 616 P.2d 56, 60 (Ct. App. 1980) (“[T]he buyer stood ready, willing and able to perform. This well settled condition precedent must be satisfied in order for the buyer to be entitled to the remedy of specific performance.”); Shreeve, 65 Ariz. at 41, 173 P.2d at 645 (“[I]f defendant has openly refused to perform, the plaintiff need not make a tender or demand; it is enough that he is ready and willing to perform the contract.”); Specific Performance § 134 (2014) (“To succeed in an action for specific performance of a contract for the purchase of real property, a petitioner must show by clear and convincing evidence that there is a valid contract to purchase real property and that he or she is ready, willing, and able to perform his or her obligations under the contract.”). 

Therefore, if a prospective purchaser can demonstrate that he or she was at all times ready and willing to perform the contract, specific performance will be available in the absence of a legitimate and articulable equitable defense. Specific Performance § 134. In other words, a claimant may not simply demand that a party specifically perform on a contract without proving that he or she desired and was able to perform her half of the contract. 

Finally, because equity will not undertake to do a vain and useless thing, specific performance will not be awarded against a seller in a land contract when the seller has no title to the real property he contracted to convey. Canton, 156 Ariz. at 470, 753 P.2d at 160 (citing Specific Performance § 126). This is true even where the want of title is caused by the seller’s own action in conveying the property to a third party. Id. (citing Grummel v. Hollenstein, 90 Ariz. 356, 359, 367 P.2d 960, 963 (1962) (en banc)). 

Lack of Remedy At Law

Finally, specific performance is only available if monetary damages do not adequately compensate the non-breaching party for his loss. Consequently, the general rule is that specific performance can be obtained in only two situations. First, specific performance may be suitable when the subject matter of the contract is “unique” in its nature. In other words, such a remedy may be granted if the item has sentimental value that cannot be quantified monetarily, such as if the item is extraordinarily collectable or one of a kind. Second, specific performance may be granted when the subject of the contract is the sale of real property. 

Specific performance is available as a remedy to enforce contracts for the sale of real property because the remedy of monetary damages is usually considered inadequate. Id. (citing Woliansky v. Miller, 135 Ariz. 444, 446, 661 P.2d 1145, 1147 (Ct. App. 1983)). In Canton, the seller of a condominium breached the sales contract and subsequently conveyed the property to a third party. Id. at 469, 753 P.2d at 159. The buyer sued for specific performance, asking the court to direct the seller to transfer the title to the buyer. Id. The court reasoned specific performance cannot be granted where it is dependent upon the acts or assent of a third person not a party to the litigation. Id. (citing Specific Performance § 92). The buyer then argued the contract should have been enforced because the buyer received advantageous financing on the purchase and would lose the financing if specific enforcement was not granted. Id. However, the court reasoned “equitable remedies such as specific performance are necessary only when the legal remedy such as damages is inadequate.” Id. Therefore, because “loss of advantageous financing may clearly be redressed by damages,” the court held that specific performance was not appropriate. Id.

Cancellation Provisions Must Be Strictly Followed

A precarious situation that sometimes arises is when a party breaches a sales contract, leading the other party to attempt to cancel the contract. Often, this does not create any new legal issues outside of a possible breach of contract claim; however, the seller must be careful to strictly follow any cancellation procedures found in the sales contract. 

Under Arizona law, when a breach of a sales contract occurs and the contract provides an exclusive procedure for cancellation upon breach, the non-breaching party’s failure to follow that procedure leaves the contract intact and allows the breaching party to cure the breach through specific performance and force the other party to perform on the contract. See, e.g., Horizon, 142 Ariz. at 136, 688 P.2d at 1028; Blackmore v. Honnas, 141 Ariz. 354, 356, 687 P.2d 362, 364 (Ct. App. 1984); Secan v. Dunbar, 139 Ariz. 503, 506, 679 P.2d 526, 529 (Ct. App. 1983); O’Hare v. Griesmer, 132 Ariz. 30, 33, 643 P.2d 733, 736 (Ct. App. 1982). However, if a party not in compliance abandons the contract, he cannot later comply with it and demand performance because the other party thereafter did not follow the terms of the contract as to cancellation. Blackmore, 141 Ariz. at 356, 687 P.2d at 364 (citing O’Hare, 132 Ariz. 30, 643 P.2d 733). 

For example, in Horizon, escrow failed to close on the stated date and months later, after learning the seller intended to back out of the contract, the buyer tendered full performance. 142 Ariz. at 133, 688 P.2d at 1025. After the seller sued to quiet title, the court held the buyer was entitled to specific performance because the seller had not cancelled the contract pursuant to its terms before the buyer performed. Id. at 136, 688 P.2d at 1028. Because the seller had not sent the required notice of cancellation, “the contract was in full force and effect.” Id. The same result occurred in O’Hare, in which the seller contended that the buyer breached the contract by failing to close escrow by the designated date. 132 Ariz. at 33, 643 P.2d at 736. The court reasoned that “[a]lthough the [buyer] did nothing toward performance during the [escrow period], he had a right to rely on the contract provision requiring notice to him if the sellers were going to cancel.” Id.

In Secan, a seller of real property attempted to cancel its contract to sell its interest in the property due to the buyer’s non-performance, but the seller’s cancellation letter did not contain the required 10-day notification language. 139 Ariz. at 505, 679 P.2d at 528. A week after the attempted cancellation and 39 days after the agreed-upon closing date, the buyer tendered full performance. Id. In granting specific performance to the buyer, the court reasoned that although the buyer’s failure to close on time gave the seller the right to cancel the contract, the seller could cancel only according to the method specified in the contract. Id. at 506, 679 P.2d at 529. Thus, although the buyer initially failed to comply with the agreement, he “rectified the failure” by complying with the contract’s requirements before the seller sent the required form of cancellation notice. Id.

Notably, where a contract for the sale of real property is rescinded by mutual consent, the rights of the parties under the contract are extinguished—neither can base any claim thereon, or compel specific performance. Reed v. McLaws, 56 Ariz. 556, 563, 110 P.2d 222, 225 (1941). Accordingly, where a contract for the purchase of land has been rescinded by mutual consent, the parties should be restored as nearly as possible to the status quo. Id.

Conclusion

In summary, specific performance is an equitable remedy that is available when a party to a sales contract for real property is harmed by the other party’s nonperformance. If the non-breaching party can prove there was a contract and that he was willing and able to perform on the contract, he may be able to bring a successful specific performance action. If the non-breaching party does not wish to perform, he should be sure to cancel the contract as provided in the contract itself. If he fails to do so, the breaching party may be able to tender full performance and bring his or her own specific performance action.
If you would like to discuss your legal matter, please contact Robert Mitchell at rdm@tblaw.com or at (602) 452-2730.
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