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Commentary: Flip this house: Spurned buyer seeks lost profits

Pat Murphy

What a great way to make money! Buy an old house, fix it up, and then resell it for a tidy profit. Let the good times roll!

Of course, the A&E reality show “Flip This House” well documents how painful the process can be.

As a homeowner myself, the wallet trembles at the thought of home improvement. In fact, the whole idea conjures up images of Tom Hanks’ misadventures in “The Money Pit.”

Sure, there are professional house flippers who are good at what they do and who can count on making a handsome living from their dealings.

But given the speculative nature of the real estate market, it still comes as something of a surprise that a California jury would award $600,000 in lost profits to an experienced house flipper who was snubbed in his efforts to purchase a decrepit San Francisco home.

The case had its genesis in the salad days, before the U.S. housing bubble burst.

In 2002, Dennis Wong and Yui Hei Chan came across a juicy property on Greenwich Street in San Francisco. The house was a ripe plum, very old, damaged, and unoccupied.

Wong and Chan had experience as partners in house flipping. Wong and his wife, Donna, were in the business of purchasing investment properties. Chan was a licensed general contractor who had been involved in remodeling and building houses.

During the course of their informal partnership, Wong would buy a property, Chan would fix it up, and the two would split the profits on resale.

With the Greenwich Street property in their sights Chan and Wong came to an oral agreement that Wong would buy the property and Chan would remodel or rebuild it. Under the deal, Chan was to receive 20 percent of the profit when the home was resold.

Wong purchased the property for $711,000 and Chan started making design plans and lining up permits for the project.

Unfortunately, Wong died unexpectedly on Dec. 27, 2002, three months after purchasing the Greenwich Street home.

Chan wanted to proceed with the project and created Greenwich S.F., LLC for the purpose of purchasing the Greenwich Street home from Donna, Wong’s wife. Donna initially agreed to sell but later backed out of the deal, apparently thinking that Chan was trying to cheat her.

Chan sued Donna for breach of the real property sales agreement and came out smelling like a rose: a jury awarded him $600,000 in lost profits, among other damages.

Yesterday, the California Court of Appeal rained on Chan’s parade by overturning the award for lost profits.

No, the court did not decide that lost profits are never recoverable for breach of a real property sales agreement. To the contrary, the court took the step of expressly recognizing that state law allows an award of lost profits in these circumstances.

“[T]he generally accepted inclusion of lost profits as a component of consequential or special damages in other breach of contract contexts and by other states in the context of breach of contracts to convey real property, taken together, persuade us that lost profits may be awarded as part of consequential damages under [state law] upon a proper showing,” the court said.

Unfortunately for Chan, the court went on to conclude that he had failed to make his case for lost profits.

The court explained that the “lost profits claim was based on the assumption that Greenwich S.F. would have constructed the residence according to the plans and specifications without changes and that the venture would have been profitable. These assumptions were inherently uncertain, contingent, unforeseeable and speculative. …

“The proposed real estate development project here involved numerous variables that made any calculation of lost profits inherently uncertain. We conclude the evidence was insufficient to show lost profits with reasonable certainty.” (Greenwich S.F., LLC v. Wong)

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