Breach of an Option Agreement for Real Property

The remedy when one party breaches an option agreement for real property has not often been discussed by California courts.  Given the commonplace nature of option agreements, this is a curious phenomenon.  The case that best and most directly addresses the issue is Schmidt v. Beckelman (1960) 187 Cal.App.2d 462.  The Schmidt court noted that:

No authorities have been cited by either party, nor have we been able after extensive research to find any, which discuss the measure of damages in a case of a breach of an option to buy real property where there was never any election to exercise the option.

Schmidt, supra, at 470.

The Schmidt court held that the measure of damages set forth in Civil Code Section 3306 (the difference between the price agreed to be paid and the value of the estate agreed to be conveyed at the time of the breach) was not a proper measure of damages. Ibid.  Instead:

The true measure of damages would appear to be actual damages under the provisions of [Civil Code] section 3300.  An item of damage, of course, would be the value, not of the land itself, but of the conditional right to purchase the land, less the amount agreed to be paid.

Schmidt, supra, at 471.

The Schmidt court acknowledged that application of the measure of damages in Civil Code section 3300 is “a factual matter for determination by the court under all the circumstances of the case.” Ibid.  Treatises have adopted Schmidt as the definitive rule of law setting the measure of damages for a breached unexercised option agreement (i.e. damages calculated pursuant to Civil Code Section 3300). See, e.g., 3-70 California Real Estate Law & Practice § 70.40.

Civil Code section 3300 sets the measure of damages as “the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom.”

According to the standard of law, therefore, the calculation of damages on this issue is to be left to the discretion of the trier of fact, who should attempt to set a value for the actual harm caused to the aggrieved party.  This standard vests extensive discretion with the trial court judge to decide what figure of damages is fair under the circumstances.

If you are a party to an option agreement that has been breached, call LloydWinter P.C.  We can help you gather the necessary documents and information to present a case for damages before the court.