Mike King
April 18, 2012 — 2,526 views  
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Many real estate deals struck in early 2006 didn't look so good by 2008!  Such was the case for Ralph and Carolee Thomas. 

In January 2006, Mr. & Mrs. Thomas signed a contract to buy a new luxury residence for $3,295,000 "not including upgrades."  Mr. & Mrs. Thomas paid a total of $659,000 in earnest money deposits during construction.  The rest of the $3,295,000 was due on or before the close of escrow.  The seller of the new resort villa was Montelucia Villas, L.L.C. in Paradise Valley, Arizona. 

Montelucia sent Mr. & Mrs. Thomas a letter on April 25, 2008 notifying them that the closing date on the luxury villa would be May 16, 2008.  By then, paying another $2.6 million didn't seem like a good idea to Mr. & Mrs. Thomas.  They wanted out of the deal. 

So Mr. & Mrs. Thomas sent Montelucia a letter dated May 6, 2008 saying they were "terminating the agreement" because no certificate of occupancy had been issued by the Town of Paradise Valley for the villa.  The letter from Mr. & Mrs. Thomas asked Montelucia to tell the title company to give the earnest money deposit back.  Montelucia refused to give the $659,000 back and Mr. & Mrs. Thomas sued. 

In the lawsuit, Mr. & Mrs. Thomas alleged breach of contract and breach of the covenant of good faith and fair dealing, along with accusing Montelucia of violating statutory obligations.  Montelucia counterclaimed for breach of the purchase agreement because the Thomases had refused to close the deal.  Montelucia also asked the court to compel Mr. & Mrs. Thomas to buy the home. 

The trial court thought that Mr. & Mrs. Thomas were right.  The court of appeals disagreed, however. 

The court of appeals said that Mr. & Mrs. Thomas had committed an anticipatory repudiation of the contract.  "An anticipatory repudiation is a breach of contract giving rise to a claim for damages and also excusing the necessity for the non-breaching party to tender performance."  Thomas v. Montelucia Villas, L.L.C., 1 CA-CV 10-0761 (March 27, 2012).  When Mr. & Mrs. Thomas breached the contract with their letter to Montelucia, they were no longer "entitled to demand performance from the innocent party. . . ." 

Montelucia had not breached the contract when Mr. & Mrs. Thomas sent their termination letter.  Montelucia had until the closing date of May 16, 2008 to perform its obligations under the agreement.  "The time for Montelucia's performance had not yet arisen."  The court noted:  "Generally, a contract cannot be breached until the date the duty of performance arrives." 

But the Thomases argued that Montelucia was not willing and able to perform under the contract.  The court said, however:  "To recover damages for anticipatory breach, the injured party need only show that he had the ability to perform his own obligations under the agreement."  As soon as Mr. & Mrs. Thomas repudiated the contract, Montelucia had no further obligation to do anything under the contract. 

If Mr. & Mrs. Thomas had really been concerned about whether Montelucia could get the certificate of occupancy and close the transaction, they should have notified Montelucia in writing about its failure to substantially comply with the purchase contract and should have given Montelucia time to cure the deficiency.  So, they could have told the seller that it was not in compliance with the agreement, but they went too far when they terminated the agreement in the notice. 

So what can we learn from this example?  Be careful when you try to get out of a contract!  Read the contract carefully and seek legal advice in advance.  Ask the other side to prove that it will be able to perform the contract.  If the other side refuses to assure you that it will be able to perform the contract, it may be in breach for anticipatorily repudiating the contract.  You want to make sure the other guy breaches first!

If you have any questions about interpreting or terminating contracts, please feel free to call me. 

Mike King

Gammage & Burnham PLC

Michael R. King is a founding partner of Gammage & Burnham, P.L.C., a Phoenix law firm with diverse areas of emphasis. His practice primarily centers around bankruptcy and creditors' rights, commercial litigation, including uniform commercial code cases, and real estate and business law. Mr. King is a former of the Creditor/Debtor Rights Committee and is a current member of the Bankruptcy, Real Estate and Construction Law Sections of the State Bar of Arizona. He is the past chair of the Board of Trustees of the Maricopa County Bar Foundation. Mr. King is an active alumnus of The University of Arizona, where he received his B.A. and J.D. degrees, with distinction and high distinction.