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Skelly Oil Co. v. Ashmore

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Brief Fact Summary.

Plaintiff agreed to purchase Defendants’ property. Prior to closing a fire destroyed the building and Plaintiff received insurance proceeds. Plaintiff sued Defendant for specific performance of the contract and a reduction of the purchase price. The trial court ruled for Plaintiff on both counts. Defendants appealed 

Synopsis of Rule of Law.

When a conveyance of real property includes land and buildings and the buildings constitute an important part of the bargain and of the value of the estate, the seller bears the risk of loss until the closing.

Points of Law - Legal Principles in this Case for Law Students.

It is thus stated in Libman v. Levenson When the conveyance is to be made of the whole estate, including both land and buildings, for an entire price, and the value of the buildings constitutes a large part of the total value of the estate, and the terms of the agreement show that they constituted an important part of the subject matter of the contract the contract is to be construed as subject to the implied condition that it no longer shall be binding if, before the time for the conveyance to be made, the buildings are destroyed by fire.

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Facts.

Skelly Oil Company (Plaintiff) agreed to purchase the property in question from the Ashmores (Defendants) along with the “buildings, driveways, and all construction thereon” for $20,000. Prior to the closing, a fire destroyed a building which was covered by a $10,000 insurance policy. The building was valued at over $12,000 before it was destroyed. The purchase agreement did not specify who would bear the risk of loss or how insurance proceeds would be distributed. The Defendants received the insurance proceeds, and Plaintiff sued for specific performance of the contract and a $10,000 reduction of the purchase price. The trial court ruled for Plaintiff on both counts, and the Defendants appealed.

Issue.

Whether a seller bears the risk of loss until the closing when a conveyance of real property includes land and buildings and the buildings constitute an important part of the bargain and of the value of the estate.

Held.

Yes. The trial court’s ruling is affirmed. When a conveyance of real property includes land and buildings and the buildings constitute an important part of the bargain and of the value of the estate, the seller bears the risk of loss until the closing.

Dissent.

(Storckman, J.):While the majority purports to abandon the rule of equitable conversion, it proceeds to do exactly the opposite in its application of the Massachusetts rule. Under the Massachusetts rule, the contract should be unenforceable if the buildings constituted a large portion of the value of the estate. Yet the majority apparently believes the building’s value was not a large portion of the estate’s value despite it being more than 50 percent of the purchase price. Instead the majority applies equitable principles to reach its decision. If the building does not represent an important part of the bargain, the Massachusetts rule calls for “compensation for any breach” or damages. Yet the court simply awards the proceeds of the insurance policy without any determination of the damages due. Accordingly, the court should deny the reduction of the purchase price but award specific performance based on the original purchase price minus compensation for damages, if any.

Discussion.

This court declines to follow the arbitrary rule of equitable conversion and follows the Massachusetts rule.If the buildings are destroyed by fire after the contract is executed but before the deed is delivered, the contract is unenforceable and the purchaser may cancel the contract. The buyer is also entitled to a return on any advance payment. The seller should protect his property through insurance. If the value of the property is not significantly decreased or if the buildings were not so fundamental to the exchange to warrant cancellation of the contract, specific performance may be ordered, with compensation for breach or damages. The doctrine of equitable conversion is based on principles of equity. To compel specific performance of a contract where the buildings, being an important and valuable part of the parties’ bargain, are destroyed would be inequitable because the buyer is forced to pay for something that the seller cannot provide. Here, the agreement of sale specifically recited that the land was to be sold “together with the buildings, driveways, and all construction thereon.” Furthermore, the building was valued at $12,537 before it burned down, thus Defendants cannot credibly say the building was of little value to Plaintiff. Finally, enforcement of the contract would not be inequitable toward the Defendants because they will still receive exactly what they bargained for, the full purchase price.


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