ANALYSIS OF NOVEMBER 30, 2017 SUPREME COURT OPINION
(Posted November 30, 2017) The Supreme Court today decides an appeal involving a breach-of-contract claim in the third-party-beneficiary context. The case is Rastek Constr. & Devel. Corp. v. General Land Commercial RE Co., from Chesterfield County.
In 2010, Rastek contracted to sell a commercial tract to an entity known as G & G Harley Club. The sale price was $3 million; closing was set for October 1 of that year. But the sale didn’t close as scheduled. The parties revised their agreement to allow for closing in March 2011, but that didn’t happen, either; nor did the parties close by either of two subsequent dates. Eventually, a bank foreclosed on the property and resold it to the Harley Club, which presumably got the land for less than the original contract price.
In this way, the bank got paid; the club got its land; the seller got rid of the property at a challenging time for the real-estate market; everybody got what they wanted, with one exception. The original contract contained a provision obligating the seller to pay a real-estate broker a commission once the sale closed. The obligation was expressed as a condition precedent: “if and only if closing occurs.”
Well, no closing occurred, so you might figure that the broker is out of luck. But it would not be dissuaded so easily: the broker sued the seller anyway, claiming that the seller had improperly prevented the closing by not coming up with funds sufficient to clear liens against the property (including the bank’s mortgage). The trial court rejected a demurrer and eventually granted judgment to the broker for the amount of the commission.
The seller appealed, and today the Supreme Court reverses and enters final judgment. The trial court had based its ruling on something called the prevention doctrine. That principle states that if a deal falls through and you caused it to do so, then you can’t rely on the failure to close as a defense to liability.
Justice Kelsey writes for a unanimous court. He notes that the prevention doctrine requires affirmative conduct, not merely passive inability to comply with contract terms. Specifically in this context, it requires proof of “a purposeful act or omission that wrongfully prevented the if-and-only-if condition of closing from being satisfied.” (Internal quotation marks omitted) Not having enough money on hand on the scheduled closing date doesn’t meet that standard, so the seller is entitled to judgment. The court also points to another unfulfilled condition precedent to closing: a final certificate of occupancy from the County. The County had issued only a temporary CO.
I’ll mention a couple of other issues that stood out to me. The first is the court’s discussion of the third-party-beneficiary doctrine. In most real-estate deals, real-estate agents and brokerages sign the contract, so they have a direct claim. That didn’t happen here, so the brokerage has only a derivative claim. The broker had sued the buyer, too; but that claim died because of the statute of frauds, which bars real-estate commission claims based on oral contracts.
There’s one last point that illustrates a principle that’s familiar to appellate lawyers. The justices today rule that the trial court should have sustained the seller’s demurrer; the court holds that the complaint fails to state a claim, since there was no duty as a matter of law.
That being said, there’s one seeming omission here that might give the occasional practitioner pause. Here’s the text of footnote 4: “While the trial court’s order alludes to a November 20, 2015 demurrer hearing, no transcript of that hearing appears in the record.”
My readers have heard me preach often about the need to have a court reporter take down everything in a trial-court proceeding, except perhaps your lunch order. This decision points out one exception to that general advice. Because a demurrer raises issues of law, it isn’t essential to have a transcript of proceedings when you’re appealing a ruling like this. A demurrer can only be sustained based on grounds asserted therein, so the question in the Supreme Court is identical to the one in the trial court: Does this complaint state a claim? I still believe that the best practice is to include a demurrer-hearing transcript, but in appeals like this one, you won’t be out of options if you don’t have one.