Opinion by Judge J. JONES.
This case arises from a sale of real property and assets involving the following parties: Loveland Essential Group, LLC (Buyer); Grommon Farms, Inc., Gary Grommon, and Connie Grommon (collectively Seller); and Martin Jara and PoolTyme, L.L.C. (collectively Tenant). The district court found that Seller had breached two contracts (a real estate purchase agreement and an asset purchase agreement) and a warranty deed by conveying the property subject to an encumbrance, the lease, but awarded Buyer no damages. The court ruled in Seller's favor on Buyer's fraud claim, which also pertained to the existence of the lease.
Buyer appeals and Seller cross-appeals various aspects of the district court's judgment. We uphold the district court's findings that Seller breached the real estate purchase agreement and the warranty deed by conveying the property subject to the lease, as well as the court's finding that Buyer did not prove fraud. However, we reverse the district court's finding that Seller breached the asset purchase agreement. We also conclude that the court applied an incorrect measure of damages to Buyer's breach of contract and breach of warranty claims. Therefore, we affirm in part, reverse in part, and remand the case for further proceedings regarding Buyer's claimed damages.
In March 2006, Seller and Buyer entered into a letter of understanding for the sale of Loveland RV Village, which comprised two parcels. A recreational vehicle park was on one parcel (the RV Property). A sports bar was on the other, smaller parcel (the Bar Property), which Seller leased to Tenant.
In April 2006, Seller and Buyer entered into a Real Estate Purchase Agreement (RPA) and an Asset Purchase Agreement (APA), in which Seller agreed to sell the real property and assets, respectively, of Loveland RV Village to Buyer. The RPA required that there not be any encumbrances on the real property, other than those identified therein. The APA similarly required that there not be any encumbrances on the assets, other than those identified therein. Neither the RPA nor the APA identified Tenant's lease as an encumbrance.
During negotiations, Seller allegedly told Buyer that Tenant paid $2,800 per month under an oral month-to-month lease for the Bar Property. But two days before closing, Buyer discovered that Tenant had a written lease for the Bar Property, and received a copy of that lease the following day. According to the written lease, Tenant's rent obligation is $2,800 per month. It states that it would expire on April 1, 2009, but gives Tenant an option to renew it for an additional six years, an option Tenant exercised during the pendency of this litigation. Representatives of Seller and Tenant testified that they signed the lease in 2005, but backdated it to 2003.
Buyer sent Seller a written objection to the lease the day of the closing. Seller responded that Buyer had to accept the lease
Several months after Buyer took possession, it sent Tenant three notices to quit the Bar Property. Tenant refused. Buyer filed separate lawsuits against Seller and Tenant, which the court consolidated. Buyer claimed that Seller breached the RPA, the APA, and the Warranty Deed by conveying the property subject to the lease; Seller committed fraud by representing that it did not have a written lease with Tenant; Tenant conspired to commit fraud by executing the written lease on the eve of closing and backdating it; and Seller was obligated to indemnify Buyer for damages incurred by virtue of the existence of the lease. Tenant asserted a counterclaim for intentional infliction of emotional distress, alleging harassment by Buyer arising out of the dispute over the validity of the lease.
The case was tried to the court. The court found that Seller breached the RPA, the APA, and the Warranty Deed because the lease encumbers the property. However, the court did not award Buyer any damages, concluding that Tenant's payment of fair market rent under the lease ($2,800 per month) means that Buyer is not harmed by the existence of the lease. The court also found against Buyer on its fraud and conspiracy claims, finding that the lease was validly executed in 2005 and that Buyer was aware of the written lease and its terms before the closing. The court found against Tenant on its counterclaim, but determined that Tenant was entitled to an award of its reasonable attorney fees from Buyer under the prevailing party provision of the lease, and subsequently ordered Seller to indemnify Buyer in the amount of Tenant's reasonable attorney fees. Finally, the court concluded that Buyer was not entitled to an award of its attorney fees from Seller.
Buyer contends the district court erred by (1) concluding that it was not entitled to damages from Seller for breach of the RPA, APA, and Warranty Deed; (2) concluding that it was not entitled to an award of its reasonable attorney fees; and (3) finding that Seller did not commit fraud.
We conclude that a remand is necessary for further findings on Buyer's claimed damages, but otherwise reject Buyer's contentions.
Relying on Downtown Parking Co., Inc. v. Vorbeck, 524 P.2d 629 (Colo.App.1974) (not published pursuant to C.A.R. 35(f)), the district court ruled that the proper measure of damages for a breach of an agreement to convey property free and clear of encumbrances, where the encumbrance at issue is a lease, is the fair rental value of the property to the expiration of the lease term.
Buyer contends the court applied an incorrect measure of damages. It argues that the proper measure is the diminution in the property's fair market value caused by the existence of the lease—as measured assuming a more profitable use than that to which the property is currently being put—rather than the measure articulated in Downtown Parking. We agree that under the circumstances here, Buyer could claim damages for diminution in the value of the property potentially exceeding the fair rental value of the property. Because the district court did
We review de novo the district court's application of governing legal standards; however, the district court "has the sole prerogative to assess the amount of damages and its award will not be set aside unless it is manifestly and clearly erroneous." Morris v. Belfor USA Group, Inc., 201 P.3d 1253, 1257 (Colo.App.2008).
"In a breach of contract action, the measure of damages is the amount it takes to place the plaintiff in the position it would have occupied had the breach not occurred." Acoustic Marketing Research, Inc. v. Technics, LLC, 198 P.3d 96, 98 (Colo.2008). This principle applies to breaches of covenants in real estate purchase contracts and warranty deeds. See 14 Richard R. Powell, Powell on Real Property § 81.04[2] (Michael Allan Wolf ed., 2009) (Powell); see also Terry v. Salazar, 892 P.2d 391, 393 (Colo.App.1994) (deeds are generally construed in accordance with rules of construction of written instruments), aff'd, 911 P.2d 1086 (Colo.1996); cf. Clough v. Williams Production RMT Co., 179 P.3d 32, 42 (Colo.App.2007) (applying this principle to a breach of a covenant in a lease).
At issue here are breaches of covenants against encumbrances.
Feit v. Donahue, 826 P.2d 407, 410 (Colo. App.1992) (quoting in part 7 George W. Thompson, Real Property § 3183, at 272 (1962)); see Powell § 81A.06[2][c][i], at 81A-117. An unexpired lease is an encumbrance. Feit, 826 P.2d at 410; Downtown Parking, 524 P.2d at 631; see Powell §§ 81.03[6][d][iii], 81A.06[2][c][iv].
A covenant warranting that the property is free from encumbrances is an agreement to indemnify the purchaser from any loss to the value of the property due to an encumbrance's existence. S. Utsunomiya Enterprises, Inc. v. Moomuku Country Club, 75 Haw. 480, 866 P.2d 951, 962 (1994); Campbell v. Karb, 303 Or. 592, 740 P.2d 750, 752 (1987); Patel v. Khan, 970 P.2d 836, 840 (Wyo.1998); see Powell § 81A.06[2][c][i], at 81A-177, § 81A.06[4][b], at 81A-129. Thus, in the event of a breach of this covenant, where the purchaser has paid to remove an encumbrance or has the right to do so unilaterally, the necessary reasonable expense to cure the defect (not exceeding the amount the purchaser paid the covenantor for the property) is the proper measure of damages. Evans v. Faught, 231 Cal.App.2d 698, 42 Cal.Rptr. 133, 141 (1965); Clark v. Fisher, 54 Kan. 403, 38 P. 493, 495 (1894); Campbell, 740 P.2d at 752-53; see Powell, § 81A.06[4][b], at 81A-129. But in the absence of such expense or the unilateral right to pay to extinguish the encumbrance, the measure of damages is the diminution in the property's fair market value caused by the encumbrance's existence (again, not to exceed the purchase price). Evans, 42 Cal. Rptr. at 141; see Powell § 81A.06[4][b], at 81A-129.
In Downtown Parking, the division articulated the measure of damages where the existence of a lease breaches a covenant against encumbrances as "the fair rental value of the property to the expiration of the term of the lease." 524 P.2d at 631. Believing itself to be bound by this pronouncement, the district court here considered only that measure and, though noting the parties' respective
The measure of damages articulated in Downtown Parking is also recognized by (generally older) cases from other jurisdictions and treatises. See, e.g., Musial v. Kudlik, 87 Conn. 164, 87 A. 551, 554 (1913); Klippel v. Borngesser, 188 N.W. 654, 655 (1922); 11 Thompson on Real Property § 96.16(c)(2), at 785 (David A. Thomas ed., 2002). These cases, however, typically concern property as to which leasing and collection of rent is not only the use of the land at the time of sale, but as to which such use is the highest and best use of the property.
We agree that, where the encumbrance at issue is a lease, the difference between the fair rental value and the rent under the lease, if any, may represent the diminution in the property's value where the lease is consistent with the highest and best use of the property. In such cases, this measure truly represents the loss in value. But where the existence of a lease precludes development of the property for some more profitable use (that is, the lease does not represent the highest and best use of the property), this measure may not adequately compensate the buyer for the loss in value. In these cases, the loss in value will be the difference between the fair market value of the property with the encumbrance and the fair market value without it. See Evans, 42 Cal.Rptr. at 141-42; Lacosse v. Wergin, 175 Wis.2d 624, 502 N.W.2d 283, 1993 WL 91578, *7 (App.1993) (unpublished table decision) (citing Wisconsin Supreme Court cases both pre- and post-dating Klippel).
Here, Buyer alleged that the property was not being put to its highest and best use. It alleged diminution in value attributable to its inability to develop the property for retail purposes because of the lease. Though Seller contends that the district court concluded that Buyer's evidence of highest and best use and concomitant diminution in value was legally insufficient, the court's order reveals no such conclusion. Rather, the court merely noted the lender's appraiser's and the parties' respective experts' differing opinions as to the highest and best use of the property. The court did not make findings on Buyer's expert's opinion of diminution in value. (As noted, the court did make findings as to the fair rental value based, in part, on certain testimony of these witnesses.) We, of course, cannot make any such findings, as they would depend in large part on credibility determinations.
Therefore, we must remand the case to the district court for further findings on Buyer's damages. The essential question the court must decide is whether Buyer met its burden of proof by presenting substantial, credible evidence of diminution in fair market value. See Mahan v. Capitol Hill Internal Medicine P.C., 151 P.3d 685, 689 (Colo.App. 2006) (a claimant must present substantial evidence which, together with the inferences which reasonably may be drawn therefrom, must be sufficient to provide a reasonable basis for computation of damages); see also Gill Grain Co. v. Poos, 707 S.W.2d 434, 439 (Mo.Ct.App.1986) (burden of providing such evidence is on the party claiming a breach of the covenant); Powell § 81A.06[4][c], at 81A-130 (same). If not, Buyer is not entitled to any damages, because the court has already determined that Buyer did not prove any damages under the fair rental value measure.
Buyer contends that the indemnity clauses in the RPA, APA, and Warranty Deed entitle it to reasonable costs and attorney fees it incurred in suing Tenant to determine the validity of the lease (the conspiracy claim), and therefore the district court erred in denying its request for such damages. Buyer similarly contends the indemnity clauses entitle it to an award of costs and fees it incurred in suing Seller, and that the district court erred in refusing to award it such costs and fees. We are not persuaded by either contention.
Buyer's contention presents an issue of contract interpretation, which we review de novo. Agritrack, Inc. v. DeJohn Housemoving, Inc., 25 P.3d 1187, 1192 (Colo.2001); Newflower Market, Inc. v. Cook, 229 P.3d 1058, 1061 (Colo.App.2010).
Paragraph 5.01(n) of the RPA provided, in relevant part:
The Warranty Deed provided:
With respect to its claim for damages consisting of costs and fees incurred in suing Tenant, Buyer cites Tibbetts, 578 So.2d 17, in which the court held: "A covenantee is entitled to recover attorney's fees expended in a suit to maintain or defend title against a third party when the third-party action was made necessary by the covenantor's breach of covenant." Id. at 19. We do not see how Buyer's unsuccessful suit against Tenant was necessary to either maintain or defend Buyer's title.
Buyer's contention that the provisions at issue are fee-shifting provisions entitling it to an award of costs and fees incurred in suing Seller fares no better. Divisions of this court have held that similar indemnity provisions apply "only to attorney fees incurred in defending claims asserted by third parties against the indemnitee, not to fees incurred in seeking to recover damages caused to the indemnitee by the indemnitor directly." Regency Realty Investors, LLC v. Cleary Fire Protection, Inc., ___ P.3d ___, ___ (Colo. App.2009); see Mid Century Ins. Co. v. Gates Rubber Co., 43 P.3d 737, 739 (Colo. App.2002); May Dep't Stores Co. v. University Hills, Inc., 789 P.2d 434, 437 (Colo.App. 1989); Mesa Sand & Gravel Co. v. Landfill, Inc., 759 P.2d 757, 760 (Colo.App.1988), rev'd in part on other grounds, 776 P.2d 362 (Colo. 1989).
Buyer contends the district court erred in finding that Seller did not commit fraud because Buyer possessed the written lease and had actual knowledge of its terms prior to the closing and, therefore, Buyer could not have justifiably relied on Seller's alleged representation that Tenant had a month-to-month tenancy with no written lease.
To prevail on a fraud claim, a claimant must prove: (1) the defendant misrepresented a material fact; (2) the defendant knew the representation was false; (3) the claimant did not know the representation was false; (4) the defendant made the misrepresentation intending that the claimant act on it; and (5) damages resulted from the claimant's reliance. Coors v. Security Life of Denver Ins. Co., 112 P.3d 59, 66 (Colo.2005); accord Brody v. Bock, 897 P.2d 769, 775-76 (Colo.1995). Implicit within these elements are the requirements that the claimant demonstrate that it relied on the misrepresentation and that its reliance was justified under the circumstances. See Robert K. Schader, P.C. v. Etta Indus., Inc., 892 P.2d 363, 366 (Colo.App.1994).
Whether Buyer justifiably relied on the alleged misrepresentation was a question
The court's finding that Buyer had full knowledge of the written lease and its terms before the closing is amply supported by the record. Indeed, Buyer does not appear to contest that point. Therefore, the district court did not clearly err in finding that Buyer could not have justifiably relied on Seller's alleged misrepresentation. M.D.C./Wood, 866 P.2d at 1382 (a party has no right to rely on a misrepresentation if it has "access to information that was equally available to both parties and would have led to the true facts"); Nielson v. Scott, 53 P.3d 777, 780 (Colo.App.2002) (where the plaintiff had actual knowledge of the truth or was put on inquiry notice, he could not justifiably rely on the defendant's misrepresentation); see Brush Creek Airport, L.L.C. v. Avion Park, L.L.C., 57 P.3d 738, 749 (Colo.App.2002) (the plaintiff did not reasonably rely on the defendant's misrepresentation where it was on inquiry notice). Buyer's argument to the contrary essentially requests that we reweigh the evidence and substitute our judgment for the fact finder's. We reject that request.
Seller contends that the district court erred in concluding that it breached the RPA, APA, and Warranty Deed by conveying the real property subject to the lease. We agree with Seller that it did not breach the APA, but reject its contentions as to the RPA and Warranty Deed.
In reviewing the district court's findings on breach of contract claims, we defer to its factual findings if supported by the record, but review its legal conclusions de novo. Albright v. McDermond, 14 P.3d 318, 322 (Colo.2000); Campbell v. Summit Plaza Associates, 192 P.3d 465, 475 (Colo.App.2008).
In paragraph 5.01 of the RPA, Seller warranted that it would "transfer the Property free and clear of all liens and encumbrances other than those agreed to pursuant to paragraph 4.01. . . ." Paragraph 4.01 referred to a schedule of exceptions noted in the title commitment and property conditions noted in the survey, neither of which identified the lease. Therefore, the district court concluded that because the lease constituted an encumbrance on the property, Seller breached the RPA.
Seller contends that the RPA does not cover the Bar Property, and therefore the lease could not be an encumbrance subject to paragraph 5.01. This contention fails.
Paragraph 1.01 of the RPA states, in relevant part: "Seller agrees to sell and convey unto [Buyer] . . . [property] commonly known as Loveland RV Village, 4421 East Highway 34, Loveland, Colorado 80537." Although the RPA does not expressly refer to the Bar Property's address, Buyer's representative testified that he drafted the RPA under the impression that the RV Property and the Bar Property shared the same address. The Warranty Deed itself uses only the RV Property address, but, all parties agree, conveyed both parcels. There was also testimony that "Loveland RV Village" is commonly understood to comprise both the RV Property and the Bar Property. Indeed, paragraph 1.7(d) of the APA, which the parties executed at the same time as the RPA, characterized the RPA as covering "the land and improvement[s] at the three parcels commonly know[n] as Loveland RV Village 4421 East Highway 34 Loveland, Colorado 80537. . . ."
We also reject Seller's contention that Buyer waived its right to object to the lease pursuant to paragraph 4.01. As relevant here, that paragraph provides that Buyer would have a period to object in writing to any "Schedule B exceptions [in the title commitment] or any condition of the Property as revealed by the Survey." If Seller failed to remove any such objection within ten days, Buyer could terminate the RPA or "waive, in writing, any such Objection and proceed to closing." Here, the lease was not included in the Schedule B exceptions nor was it revealed in the Survey. Therefore, by its own terms, paragraph 4.01 does not apply to the lease.
Lastly, Seller contends that Buyer waived any right to claim a breach of the covenant against encumbrances because it knew of the lease before closing. The law in Colorado is clear, however, that a buyer's mere prior knowledge of an encumbrance does not preclude an action for breach of a covenant against encumbrances. Moddelmog v. Cook, 138 Colo. 152, 156, 330 P.2d 1113, 1115 (1958); Eriksen v. Whitescarver, 57 Colo. 409, 411-12, 142 P. 413, 414 (1914); Downtown Parking, 524 P.2d at 631; see also Reinhardt v. Meyer, 153 Colo. 296, 301, 385 P.2d 597, 600 (1963) (the grantee's pre-existing knowledge that the grantor's title was defective did not preclude the grantee from asserting or recovering under a breach of warranty claim); Powell § 81.03[3].
We agree with Seller's contention that the district court clearly erred in finding that Seller breached the APA.
By its terms, the APA covers Buyer's purchase of Seller's tangible and intangible assets (collectively referred to as the "Acquired Assets"). Though the APA's list of Acquired Assets is expressly nonexclusive, the types of assets listed do not include the real property itself. The purchase of the real property was covered by a separate document, the RPA (which the APA expressly acknowledges). The Seller's promise in section 2(f) of the APA to convey the Acquired Assets "free and clear of all encumbrances" therefore was not breached by the existence of the lease. Simply put, the lease, though an encumbrance on the real property, was not an encumbrance on the Acquired Assets.
The Warranty Deed warranted that the property was "free and clear from all . . . encumbrances . . ., except . . . those listed specific Exceptions described in attached Schedule B, Section 2. . . ." The Schedule B, Section 2 exceptions did not include the lease. Nonetheless, Seller contends that Buyer waived its right to claim a breach of warranty by virtue of the existence of the lease because it knew about the lease before the closing. We have rejected this argument with respect to the RPA, and it carries no greater force in this context.
Seller's challenge to the court's determination that it must indemnify Buyer for the attorney fees Buyer was ordered to pay Tenant is based solely on its contentions that it did not breach the RPA, APA, or Warranty Deed. Because we have concluded that the district court did not err in finding that Seller breached the RPA and the Warranty Deed, Seller's challenge to the district court's ruling on Buyer's indemnification claim necessarily fails.
We deny Buyer's request for an award of its attorney fees incurred on appeal. As noted above, the indemnity provisions on which Buyer relies do not permit an award of attorney fees in actions between the indemnitee and the indemnitor. See Regency Realty Investors, ___ P.3d at ___.
The judgment is reversed as to breach of the asset purchase agreement and affirmed in all other respects. The case is remanded to the district court for further findings on Buyer's damages.
Judge TAUBMAN and Judge RICHMAN concur.
