In Republic Nat. Life Insurance Co. v. Red Lion Homes, Inc., 704 F.2d 484 (10th Cir. 1983), the Tenth Circuit Court of Appeals, sitting in diversity jurisdiction, affirmed an award of collateral lost profits for breach of a contract to sell real estate when, at the time of the breach, the non-breaching buyer did not have any third party resale contract in hand. Id. at 491.
The seller was an insurance company in possession of 92 undeveloped lots in Colorado. It entered into a contract with the purchaser that called for the seller to make certain improvements to the land (curbs, sewer and water extensions, street lighting, grading, and paving), and then to sell the improved land to the purchaser on a designated settlement date.
The seller experienced delays and did not complete the required improvements until two years and three months after settlement was to have occurred. When the seller demanded that the buyer move forward with the purchase, the buyer refused to purchased the improved lots, and sued the seller for collateral lost profits. Id. at 485.
The district court found that the seller had breached the contract to convey the improved lots. Id. at 485-86.
It awarded the buyer damages for the profit it would have realized from building and selling houses on the lots.
After noting that, under Colorado law, the ordinary measure of damages for breach of an agreement to convey real estate is benefit of the bargain damages, the court explained that, when the parties know that a breach of the contract will cause "special or unusual harm," and the damages claimed are not uncertain or remote, collateral lost profits may be awarded. Id. at 488.
The district court found that the defendant was aware that the plaintiff had planned to build homes on the lots and therefore knew that "if it failed to convey the land in the condition agreed upon it would deprive the plaintiff of the opportunity to build the houses, and hence of the profit the plaintiff would earn by so building." Id. at 489.
The court concluded that projected lost profits were not too speculative to permit recovery based upon the evidence at trial that the plaintiff was prepared to complete the development project and had experience as a developer; and that a "rudimentary market analysis" combined with past experience suggested that the houses would have sold easily and at a profit. Id. at 489-90.