Damage Presentation Key in Recovering Lost Profits

By Randy Sullivan

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Two recent cases involving failed land development transactions produced two extremely different outcomes. And, on closer examination, it’s clear the results turned on the plaintiff’s ability to demonstrate lost profits.

One case involved damages for a hotel/condominium project that was never built; the other for the failed redevelopment of a single lot. Plaintiffs won large judgments at trial. But the differences were exposed when the Court of Appeals analyzed whether the lost profits awarded were speculative.

In many ways, the differences in the awards were a product of factual distinctions, but also damage presentation.

The case of Mammoth Lakes Land Acquisition, LLC v. Town of Mammoth Lakes arose out of the town’s breach of an agreement requiring the developer to improve the town’s airport and build a hotel or condominium project.

The developer had submitted a revised development plan to the town for informal review, but not for formal approval. And ultimately the town decided not to move forward with the hotel/condominium project. A jury awarded the developer $30 million. The town appealed, claiming, among other things, that the award was based on speculative profits.

The town argued the developer’s expert made too many assumptions including: “(1) all necessary permits would be obtained, (2) environmental review would be completed, (3) estimated construction costs provided by the developer were accurate, (4) the project would be built within the estimates, (5) the developer would successfully obtain financing, (6) the developer would successfully associate with a major brand, and (7) the mix of project units could be sold within the time frame and at projected prices.”

Despite these reasonable points, the decision was upheld, in large part because the expert witness for the developer was prepared to address these points. The expert relied on actual bids and standard construction costs; sales estimates were based on a comparable development; and he had the experience in valuing these types of projects. More importantly, his analysis included a discount not only to the present value but also for the risks associated with the project where construction had not yet started. Finally, although the project was years away from producing a buyer, the expert testified that the discounted price was a price someone would pay. The court upheld the award.

The second case, Greenwich S.F., LLC v Wong, produced a far different result.

In theory, demonstrating lost profits should have been easier inGreenwich. The case involved the profits that were not realized when a seller reneged on a deal to sell property on which the buyer planned on building a new residence. In a rising market, the buyer could have recovered damages for just the breach. Damages to a buyer for a seller’s breach of a real estate purchase agreement are the difference in value of the property at the time of the contract and the date of the breach. Here, the property had not increased in value, in part, because the residence on the lot was in a dilapidated condition.

The jury returned a verdict that included $600,000 in lost profits, but, the appellate court ruled those lost profits were speculative and not recoverable.

While the plaintiff had developed another property in the past that produced $1.6 million in profits, the plaintiff made many admissions at trial regarding the unknown nature of the profits that would be produced by this transaction. For example, he testified that “he had no expectations about the certainty of any profit.”

Given the fact he was not an appraiser, strong expert testimony might have been able to save the damage award.

But, unlike the expert for Mammoth Lakes Land Acquisition LLC, this expert had neither an opinion on whether the buyer could secure financing for a construction loan, nor on the costs to construct the proposed residence. The court overturned the trial court’s award of lost profits.

These cases are also noteworthy, because neither agreement contained a liquidated damage clause setting forth the damages designated to compensate a party in the event of the other’s breach of the agreement.

Finding the right expert and making sure all angles are covered takes experience, clarity of thought and hard work.

If you find yourself facing complex real estate challenges, the experts at Patton & Sullivan are ready to help.

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Randy Sullivan, a partner at Patton & Sullivan LLC, specializes in business and real estate litigation.

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