NJ Court “Reassembles Humpty Dumpty”

April 2011Newsletters In the Zone

It is a maxim of real estate law that the buyer under an agreement of sale will be granted the right of specific performance if the seller defaults. This means that rather than having the seller pay damages for its failure to convey property in accordance with its obligations, the seller will be required to convey the property to the buyer. The theory behind this is that each piece of real estate is unique so that money damages will not make a buyer whole. Only the actual piece of real estate will suffice.

A recent case shows the lengths to which a court will go to put the buyer in a position he or she would have been in had the seller complied with its obligations under the agreement of sale.

In Marioni v. Roxy Garments Delivery Co., Inc., et al., Superior Court of New Jersey, Appellate Division, Docket No. A-1492-09T3, Marioni contracted to buy real property in Jersey City from Roxy Garments Delivery Co., Inc. Marioni, an artist, intended to use the property—which had high ceilings and open space and was in close proximity to New York City—as a residence as well as a studio and storage facility for his artwork. However, before Marioni’s closing occurred, Roxy breached the contract by selling the same property to 94 Broadway, Inc.

Marioni immediately sued for specific performance when he learned of the closing with Broadway. However, the court failed to grant Marioni specific performance right away because it did not find the facts adequate at that time to order specific performance by the seller. Instead, the court ordered a trial on money damages. The litigation to establish damages continued for two years, until the Superior Court decided Marioni was, indeed, entitled to specific performance.

During that two-year period, however, Broadway had fitted the space for tenants, entered into leases and otherwise exercised control over the space. The renovations included drop ceilings and wall partitions, which would be of no use to Marioni.

The court held Marioni was entitled to specific performance, requiring Broadway to convey the property to Marioni because Broadway was not a bona fide purchaser for value. Had Broadway been a bona fide purchaser for value, it would have been entitled to keep the property since it would have been an innocent party without knowledge of the contract between Marioni and Roxy. The court, however, found Broadway had actual knowledge of the existence of the Marioni contract and thus was not entitled to protection and had to give up the property. As a result, Broadway was in the position of a “constructive trustee” for Marioni, which meant it should receive no “entrepreneurial profit” as a result of its interim wrongful possession of and dominion over the property. Therefore, Marioni, not Broadway, would benefit from the increase in the property’s value over the two years.

The complexity, then, was how to deal with the monies that Broadway had spent at the property over the two-year period. The court referred to this as having to “reassemble Humpty Dumpty.”

In determining the price Marioni would have to pay Broadway for the property in accordance with his right of specific performance, the court started with the original contract price of $170,000 that Marioni was to have paid to Roxy. Now that Marioni was entitled to specific performance, he would pay that amount to Broadway instead, and Broadway would be required to deliver the property to Marioni. The goal of the court was to place the parties, to the extent possible, in the same positions they would have occupied had the Marioni-Roxy contract been performed as originally required.

To compute the purchase price, the court took the $170,000 and increased it by an annual amount of six percent for the interest to which Broadway was entitled on the money it paid to Roxy. This increased the purchase price by $85,617.13. The price was then increased by Broadway’s expenditures for the building improvements in the amount of $395,883. From this, $50,000 was deducted—the cost of Marioni removing the drop ceilings and partitions. The price was then increased by the insurance, taxes and mortgage interest Broadway had incurred during the two-year period (which Marioni would have incurred had he owned the property), resulting in a gross adjusted contract price of $672,518.59. However, since Broadway had received rents during the two-year period and was not entitled to profit from its actions, those rents—$487,500—were credited to Marioni, resulting in a contract price of $185,018.59.

Finally, the Superior Court remanded the case for determining whether Marioni should be entitled to a further credit for his storage costs of his artwork during the two-year period.

This case is an excellent example of how complicated it is to “reassemble Humpty Dumpty.” However, such complications, in the absence of “undue hardship” in light of the “evolving circumstances,” did not deter the court from taking on that task in this case. Potential buyers should proceed with caution when they become aware the seller may have possibly already contracted to sell the property. In addition, a spurned buyer should not give up hope of acquiring a property even if the seller has disposed of it.

For more information, please contact Melvyn J. Tarnopol at 609.572.2212 or [email protected].